TIDMPCT
RNS Number : 8800S
Polar Capital Technology Trust PLC
14 July 2020
POLAR CAPITAL TECHNOLOGY TRUST PLC
AUDITED RESULTS ANNOUNCEMENT FOR THE FINANCIAL YEAR TO 30 APRIL
2020
FINANCIAL HIGHLIGHTS
FINANCIAL SUMMARY As at As at
30 April 2020 30 April 2019 Movement
Total net assets GBP2,308,597,000 GBP1,935,646,000 19.3%
---------------- ---------------- --------
Net Asset Value (NAV) per ordinary
share 1715.59p 1446.40p 18.6%
---------------- ---------------- --------
Benchmark (see below) 2415.42 2045.12 18.1%
---------------- ---------------- --------
Price per ordinary share 1774.00p 1354.00p 31.0%
---------------- ---------------- --------
Premium/(Discount) of ordinary
share price to the NAV per ordinary
share 3.4% (6.4%)
---------------- ---------------- --------
Ordinary shares in issue* 134,566,000 133,825,000 0.6%
---------------- ---------------- --------
*The issued share capital on 10 July 2020 (latest practicable
date) was 137,265,000 ordinary shares.
KEY DATA For the year to 30 April 2020
Sterling Adjusted
Local Currency % %
---------------- -----------------
Benchmark
-----------------------------------
Dow Jones World Technology Index
(total return, Sterling adjusted,
with the removal of relevant withholding
taxes) 14.3 18.1
---------------- -----------------
Other Indices over the year (total
return)
-----------------------------------
FTSE World -4.2 -0.7
---------------- -----------------
FTSE All-Share -16.7
---------------- -----------------
S&P 500 Composite 0.9 4.6
---------------- -----------------
Nikkei 225 -7.2 -0.5
---------------- -----------------
Eurostoxx 600 -10.2 -9.2
---------------- -----------------
As at 30 April
EXCHANGE RATES 2020 2019
------- -------
US$ to GBP 1.2614 1.3037
------- -------
Japanese Yen to GBP 134.88 145.19
------- -------
Euro to GBP 1.1516 1.1632
------- -------
For the year to 30 April
EXPENSES 2020 2019
------------ ------------
Ongoing charges ratio # 0.93% 0.95%
------------ ------------
Ongoing charges ratio including
performance fee # 0.99% 1.33%
------------ ------------
Data supplied by Polar Capital LLP and HSBC Security
Services.
# Ongoing charges ratio represent the total expenses of the
Company, excluding transaction costs, interest payments, tax and
non-recurring expenses, expressed, as a percentage of the average
daily net asset value, in accordance with guidance issued by the
AIC. Prior year ongoing charges calculations include the research
cost borne by the Company from 1 May 2018 until 31 December 2018.
With effect from 1 January 2019 all research costs have been paid
by the Investment Manager.
Alternative performance measure see below.
HISTORIC PERFORMANCE
As at 30 April 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
--------------------- ----- ----- ----- ----- ----- ----- ----- ------- ------- ------- -------
Net Assets (GBPm) 398.6 468.7 503.3 528.8 606.6 793.0 801.3 1,252.5 1,551.6 1,935.6 2,308.6
----- ----- ----- ----- ----- ----- ----- ------- ------- ------- -------
Share price
(pence) 306.8 373.5 387.0 398.5 442.0 592.0 566.0 947.0 1148.0 1354.0 1774.0
----- ----- ----- ----- ----- ----- ----- ------- ------- ------- -------
NAV per share
(pence) 315.1 368.7 392.6 412.4 458.4 599.2 605.5 945.4 1159.7 1446.4 1715.6
----- ----- ----- ----- ----- ----- ----- ------- ------- ------- -------
Indices of Growth(1)
----- ----- ----- ----- ----- ----- ----- ------- ------- ------- -------
Share price 100 121.7 126.1 129.9 144.1 193.0 184.5 308.7 374.2 441.3 578.2
----- ----- ----- ----- ----- ----- ----- ------- ------- ------- -------
NAV per share(2) 100 117.0 124.6 130.9 145.5 190.2 192.2 300.0 368.0 459.0 544.5
----- ----- ----- ----- ----- ----- ----- ------- ------- ------- -------
Dow Jones World
Technology Index
(3) 100 104.7 113.4 120.2 135.9 175.9 175.7 269.5 315.4 383.1 452.4
----- ----- ----- ----- ----- ----- ----- ------- ------- ------- -------
The Company commenced trading on 16 December 1996 and the share
price on the first day was 96.0p per share and the NAV per share
was 97.5p.
Notes:
(1) Rebased to 100 at 30 April 2010.
(2) The NAV per share growth is based on NAV per share as
adjusted for warrants and subscription shares.
(3) Dow Jones World Technology Index (total return, Sterling
adjusted) and from April 2013 with the removal of relevant
withholding taxes.
All data sourced from Polar Capital LLP.
For further information please contact:
Ben Rogoff Ed Gascoigne-Pees
-------------------
Polar Capital Technology Trust Camarco
PLC
-------------------
Tel: 020 7227 2700 Tel: 020 3757 4984
-------------------
STRATEGIC REPORT
CHAIR'S STATEMENT
INTRODUCTION
Dear Shareholder,
The summer of 2019 seems in many ways a long time ago.
Shareholders may remember particularly the election of Boris
Johnson as Conservative Party leader, Brexit negotiations, and
Climate change protests in response in part to large scale fires in
Australia and the Amazon. Sino-US relations were poor and trade war
concerns worsening.
A lot has happened since then, and your Investment Manager's
report below describes events in considerable detail and provides a
very useful record.
Almost all Shareholders will have been affected in some way by
the COVID-19 pandemic and some Shareholders will have experienced
great difficulty and maybe loss. We should not pass this moment
without noting your Board's concern and sympathy for those who have
been so affected. I should also note that your Board has been in
very regular and careful touch with its Investment Manager, other
suppliers and infrastructure during these times, and has
transferred to remote working with no observable detriment.
Part of the purpose of this report is to put the 12 month period
in a longer term context, given that your Company publishes a daily
NAV and its shares are listed on the London Stock Exchange. For the
year under review, your Company's net asset value rose by 18.6% and
your Company's share price provided a total return of +31.0%
percent, compared with the benchmark return of 18.1%. All these
returns are stated in UK Sterling, which weakened against other
currencies, 3.2% of the benchmark return came from Sterling
depreciation against the US dollar. This follows three previous
years of very strong returns (from April 2016), since when the
market capitalisation of your Company has risen from GBP749m to
GBP2,387m. Over the last 10 years, with a starting point two years
on from the Global Financial Crisis, your Company's NAV has risen
by more than five times, or 19.2% annualised, from a starting NAV
of GBP398.6m.
Such returns are spectacular and unusual. They do however mask
considerable volatility and we would expect that volatility to
continue. We worry about valuations and we worry that the sector
has become a media favourite in some ways. At the same time, the
longer term trends which guide our investment approach remain very
robust, and in some ways the pandemic has given further strength to
those trends. In a world where some sectors are in turmoil, we
understand the attractions of ours.
DISCOUNTS, PREMIA AND SHAREHOLDER RELATIONS
Last year, we noted that the discount had widened from 1.0% to
6.4%. At that stage, there seemed to be no significant selling from
major Shareholders. We suggested that we wished gently to diversify
our Shareholder base over time as we consider that Polar Capital
Technology is a reasonable way for individual Shareholders to
invest in such a volatile sector, should they wish. However, we did
indicate that we did not wish to attract a sudden rush of new
investors all at once. We are pleased therefore to see that the
discount has narrowed and for the last two months of the financial
year and generally since then, the shares have been trading at a
premium. This change has resulted in the share price total return
for the financial year noted above. Although it's always difficult
to point to a single cause for such a change, we suggest that the
work the Investment Manager has put in to develop website
communication, together with changes in individual investor
preferences, have resulted in a gentle diversification of the
Shareholder base. Currently, some 18.8% of the Shareholder base is
held on retail execution only platforms, and hence we assume by
individual investors, compared with 16.7% at the end of last
year.
We have continued to seek to engage with our larger
Shareholders. We held a further event for our wealth manager
Shareholders in December 2019, reaching representatives of over 40%
of the Shareholder base. I have also contacted representatives of
our six largest Shareholders during the COVID-19 lockdown to seek
views (if any) in changing times and had helpful comments from some
of those in return.
We have issued shares in response to market demand. We have
sought to avoid spikes in the premium to net asset value at which
the shares trade but at the same time, protecting the interests of
existing Shareholders by taking care over both the amount of funds
coming into the Company at any one time, and the level relative to
net asset value at which shares are issued.
ESG
We have been discussing and developing the way ESG
('environmental, social and governance') issues affect our sector,
and indeed had a specific Board discussion about this. We are a bit
wary of some of the more box ticking approaches but are acutely
aware that there are real issues affecting the companies in which
we invest. These may range from the possibility of government
action, on which we had a specialist session on anti-trust moves in
the US, to CO2 emissions, to governance issues in companies with
strong founder Shareholders. On some measures, the risks in the
tech sector seem lower than in others, and the Investment Manager
does not have an approach which restricts investment on ESG grounds
alone. However, ESG risks are important to the overall
consideration of individual stock investment and further
information on the Company's approach and consideration of ESG is
given below.
THE BOARD
Peter Hames, who is our Senior Independent Director, and I
reached nine years of service in June. In accordance with the Board
succession plan as outlined in the 2019 Annual Report and later
here, Peter retired from the Board with effect from 8 July
2020.
Further, in accordance with the Board's policy on the tenure of
the Chair, it was agreed that I could remain on the Board and as
Chair for up to three years but it would be likely that I would
retire at the AGM in 2022, in the absence of any reason not so to
do. Neither Peter nor I took part in the Nomination Committee's
decisions relating to these matters. All Non-executive Directors,
including myself, are subject to annual re-election by
Shareholders.
I express my thanks to Peter who has been an incredible support
to the Board for the past nine years and we will miss his
contribution, particularly in relation to Asian markets and given
his great experience in investment matters. I am delighted to
confirm that Tim Cruttenden agreed to assume the role of Senior
Independent Director and Chairman of the Remuneration Committee
with effect from 8 July 2020. In this role Tim presents his first
report to you in the Annual Report.
PERFORMANCE FEE
For the third year running, I am pleased to confirm that we are
paying a performance fee, this year of GBP1.1m, (2019: GBP6.6m,
2018: GBP11.2m). As detailed in the 2019 Annual Report, the terms
of the management and performance fees were re-negotiated with
Polar Capital and following discussions with Shareholders, these
arrangements took effect on 1 May 2019. Additional payment
conditions were incorporated into the performance fee terms with
the participation rate lowered from 15% of outperformance to 10%.
The Investment Manager can accrue a performance fee by
outperforming in a down market, but the payment of a performance
fee requires both positive absolute returns and outperformance of
the Benchmark. Full details of this fee are in Note 8 to the
Financial Statements.
ANNUAL GENERAL MEETING (AGM)
The AGM is scheduled to be held on 2 September 2020. A notice of
AGM will be provided to all Shareholders and will be available on
the Company's website. This will include details of how the AGM
will be held this year.
The health and welfare of our Shareholders, service providers
and wider stakeholders is our primary concern.
The restrictions that were originally put in place by the UK
Government on 23 March in respect of social distancing, movement of
individuals and of course gatherings of individuals from outside of
the same household, have been reduced somewhat in recent weeks.
However, there remain restrictions and concern surrounding large
gatherings of individuals and in particular gatherings indoors, and
of those with contra-indications or of advancing age groups
(including me).
For this reason, following the very recent passing of the
Corporate Insolvency and Governance Act 2020 which
provides temporary provisions to companies to use alternative
methods to fulfil statutory requirements, we
have decided to hold a virtual AGM. We do appreciate and think
important open interaction with Shareholders and believe engagement
with Shareholders is paramount to the essence of the Company. We do
think that a virtual AGM is another way of engaging with
Shareholders and will be interested to see how it works. We will
therefore endeavour to facilitate Shareholder engagement in an
electronic way.
While we appreciate this is not ideal, and may be awkward for
some, we also think it may be easier for others, and a better
alternative, now that it is available, to closed door AGMs. We feel
this is the best and safest option available to us in current
circumstances.
OUTLOOK
These are particularly uncertain times. As the economist F.H
Knight, argued, - there is a distinction between conditions where
risks can be identified, in which the possible outcomes are known
and percentage probabilities can be assigned to those outcomes, but
you just don't know which is going to happen, and those conditions
of uncertainty - where you just don't know what's going on. We seem
to have political turmoil in the world's largest economy, trade and
political tensions between China and the US persist, Brexit hasn't
gone away and the impact of the COVID-19 pandemic and the measures
taken (both physical and economic) in reaction will surely last for
years. At the same time, some of the tech trends which have been in
place for some while, have been accelerating and are already
evident in some technology company results. Thus, the sector offers
an opportunity to invest in the continuation of the trends to cloud
computing, containerisation (noted last year) remote working,
online social and shopping activity and so on, whereas trends
elsewhere may be less attractive.
Sarah Bates
Chair
13 July 2020
FINANCIAL AND PERFORMANCE REVIEW FOR THE YEARED 30 APRIL
2020
This year, we have sought to provide more detailed information
about the financial results included in this report, following
requests at last year's AGM.
The net asset value per share increased to 1715.59p as at 30
April 2020 from 1446.40p at the start of the year, which represents
an 18.6% increase. The Company's total net assets increased to
GBP2,308.6m as at 30 April 2020, from GBP1,935.6m at 30 April 2019,
as a result of strong investment performance as discussed further
in the Investment Manager's Report below.
TOTAL RETURN
The Company generates returns from both capital growth and
dividend income. For the year ended 30 April 2020, the total return
was GBP360.1m (2019: GBP383.6m), of which there was a GBP365.5m
gain (2019: GBP389.9m gain) from capital and a GBP5.4m loss (2019:
GBP6.3m loss) on our "income account" taking dividend income and
offsetting all expenses against that dividend income. Full details
of the total return can be found in the Statement of Comprehensive
Income below. We choose as a matter of policy not to allocate our
expenses, between capital and income, (the performance fee is
allocated to capital). The Company's allocation of expenses is
described in Note 2(d) to the Financial Statements and the
allocation methodology is considered on an annual basis. The total
net earnings per share were 269.06p, showing a slight reduction of
6.1% from the previous year. The total net return per share was
made up of 273.12p from capital return and a loss of 4.06p from
revenue return. This decline was related to the slight reduction in
the gain in investments held (excluding derivatives and currency)
in this year of GBP348.1m compared to last year of GBP393.2m.
REVENUE RETURN
The investment income of GBP15.8m (2019: GBP12.0m) represents
dividend income derived from listed investments. The increase in
investment income of 32% for the year was driven by changes in
holdings, dividend rates and FX rate change as the Company's
revenue is generally are denominated in currencies other than
Sterling. In addition, we have received some funds from our
withholding tax reclaims. The other operating income of GBP1.1m
(2019: GBP1.1m) was derived from bank interest and Money Market
Fund interest. We have introduced holdings in the US Treasury money
market fund to diversify our deposit risk, as described below.
CAPITAL RETURN
The investment portfolio was valued at GBP2,218.3m (2019:
GBP1,803.2m) at the year end 30 April 2020. The investment
portfolio delivered a realised return on disposals of GBP33.7m
(2019: GBP93.6m) and valuation gains on investment of GBP314.4m
(2019: GBP299.6m) for the year ended 30 April 2020. The Company has
one small unquoted investment, Herald Ventures, which was valued at
GBP0.05m. The Company's valuation approach is described in note 2
(f) below. The derivative gains of GBP13.2m (2019: GBP1.5m)
represent the call and put options which are used to facilitate
efficient portfolio management, including some portfolio
protection. Full details of the derivative gains are set out in the
note 6 to the Financial Statements. For some years, the Investment
Manager has used options to provide some protection in the event of
a sharp market fall, and in the last year, this strategy did indeed
provide an amount of protection in the falls seen in March.
PORTFOLIO TURNOVER
Portfolio turnover (purchases and sales divided by two) totalled
GBP1,843.7m equating to 87% (2019: 70%) of average net assets over
the year. Details of the investment strategy and portfolio are
given in the Investment Manager's Review below. This level of
turnover is a little higher than usual given the Investment
Manager's response to the COVID-19 crisis, but lower than in the
period following the Global Financial Crisis.
EXPENSES
The total expenses amounted to GBP21.5m (2019: GBP24.1m) and
include: investment management fees of GBP18.3m (2019: GBP15.3m),
administrative expenses of GBP0.9m (2019: GBP1.1m) and finance
costs of GBP1.2m (2019: GBP1.1m). The performance fee of GBP1.1m
(2019: GBP6.6m) was charged wholly to capital. The new investment
management agreement which came into effect from 1 May 2019,
included the removal of any contribution by the Company to research
costs and provided for a reduction in marketing spend by the
Company; this resulted in a 19.8% reduction in administrative
expenses for the year. Had the previous performance fee agreement
been in place, the amount payable would have been GBP0.5m
higher.
ONGOING CHARGES
The ongoing charges ratio, as calculated in line with the AIC
recommended methodology, represents the total expenses of the
Company, excluding finance costs, expressed as a percentage of the
average daily net asset value. This ratio shows Shareholders the
annual percentage reduction in net asset value as a result of
recurring operational expenses (i.e. the expected cost of managing
the portfolio) which, whilst based on historical information,
provides an indication of the likely level of costs that will be
incurred in managing the Company in the future. The ongoing charges
ratio for the year to 30 April 2020 was 0.93%, a slight reduction
from the previous year of 0.95%. The ongoing charges ratio
including the performance fee for the year to 30 April 2020 was
0.99%, a reduction from previous year of 1.33%.
CASH AND CASH EQUIVALENTS
Over the year, the Company maintained a relatively high level of
cash, closing the year with GBP146.7m (2019: GBP194.2m). As part of
its cash diversification strategy, the Company invested 50% of its
USD cash balance into a USD Treasury Money Market Fund. As at 30
April 2020, the Company held the BlackRock Institutional Cash
Series - US Treasury Fund with a market value of GBP37m.
GEARING
The Company can use gearing for investment purposes and as
stated below, bank loans held as at the year-end amounted to
GBP57.0m (2019: GBP53.7m). The finance arrangements are made up of
two, two-year, fixed rate term loans with ING Bank N.V (JPY 5.2 bn
and USD23.3m). Both loans fall due for repayment on 2 October 2020.
The repayment of both loans would equate to 39% of the cash and
cash equivalents readily available to the Company at 30 April 2020.
Consideration to the level of borrowings required by the Fund
Manager is under review and replacement facilities will be
negotiated accordingly with ING Bank N.V. or another provider in
due course. Details of any replacement facilities will be announced
similarly.
FOREIGN EXCHANGE
The majority of the Company's assets and revenue are denominated
in currencies other than Sterling. The Company's total return and
net assets can be affected by the currency translation and
movements in foreign exchange. Note 27 (a)(ii) within the Annual
Report analyses the currency risks and the management of such
risks.
CONCLUSION
This is the first time we have set out a finance report. Should
Shareholders find this interesting and helpful, or not, do please
let us know by writing to us at the Company's registered office or
by emailing the Company Secretary. Both addresses can be found in
the Shareholder Information section of the Annual Report.
Sarah Bates
Chair
13 July 2020
INVESTMENT MANAGER'S REPORT
MARKET REVIEW
At the headline level, global equities fell modestly over the
year to 30 April 2020 with the FTSE World TR Index falling 1.5% in
Sterling terms. However, moribund returns belied one of the most
remarkable years in living memory as COVID-19 changed the world as
we knew it, ending the 11-year US equity bull market in the
process. The first two thirds of our financial year was dominated
by trade war machinations and Brexit, with related uncertainty
weighing on corporate confidence and global growth. In May, US
ten-year Treasury yields fell below 2% in for the first time since
2016. Lack of tangible trade-related progress and elevated
political risk relating to Iran, Brexit (a more belligerent
approach adopted by PM Boris Johnson) and an impeachment enquiry
into President Trump weighed heavily on growth. Third-quarter China
GDP at 6% y/y was the weakest showing in 30 years while in August,
US manufacturing recorded its first contraction since 2009.
However, markets began to price in demand policy easing by the
world's central banks. The US Federal Reserve ('Fed') responded,
delivering its first rate cut since 2008, lowering rates by 25bps
in August, followed by two subsequent cuts in September and
October. In Europe, the ECB cut interest rates too and restarted
its own quantitative easing ('QE') programme. Although Fed Chair
Jerome Powell insisted that its actions should not be viewed as a
resumption of QE, the Fed also began injecting liquidity into money
market funds from September following a spike in overnight lending
rates. These repo operations were expanded in October while the Fed
also began purchasing Treasury bills at $60bn/month. This 'stealth
QE', together with three interest rate cuts successfully
un-inverted the US yield curve. Confidence was further buttressed
by progress in trade negotiations with a 'phase one' deal agreed by
the US and China in December. The combination of monetary easing
and trade progress had the desired effect on global growth with the
Global Manufacturing PMI crossing back into expansion territory in
January.
This nascent recovery, together with any residual celebrations
associated with the UK general election and the end of (the first
phase of) Brexit, proved fleeting. News in January of a coronavirus
outbreak in Wuhan - at the time, a relatively unknown Chinese city
despite its 11m population - presaged tight travel restrictions
within China. Outside of Asia, investors were relatively sanguine;
the novel coronavirus presented in a similar way to the SARS
epidemic of nearly two decades earlier which affected 8,000 people
across 37 countries. As such, the risk it posed was considered
contained - a nasty flu-like condition that would disrupt supply
chains and restrict travel within China. Tragically wide of the
mark, this early interpretation was supported by the World Health
Organisation (WHO) who in January, advised "against the application
of any travel or trade restrictions on China".
Everything changed in February once it became apparent that the
virus had spread to more than 60 countries with the likes of South
Korea, Iran and Italy all experiencing soaring infection rates. The
WHO declared a global health emergency, while a new and menacing
name for the virus - COVID-19 - better reflected the threat it
posed. Markets plunged - US stocks suffered their worst weekly
decline since the financial crisis in late February, while global
equities entered a bear market in March. From February highs, it
took just 16 days for the S&P 500 to lose more than 20% in
local terms, the quickest descent into a bear market
on record. The oil price also plunged in record fashion, falling
47% in March, following a breakdown in talks between Saudi Arabia
and Russia at the worst possible moment. The following month, an
exhaustion of storage capacity drove the May WTI crude oil contract
to a negative price for the first time in history, reaching a low
of -$37.63 per barrel. Having begun 2020 at 13.8, the VIX index (a
market fear gauge which measures implied volatility on the S&P
500) surged to 82.7 in mid-March.
Leaning on the recent experience of the Chinese (and the earlier
Spanish Flu) governments across the world introduced stay at home /
social distancing measures designed to reduce interpersonal contact
and mortality rates and 'flatten the curve'. Strict travel
restrictions were imposed and non-essential economic activity was
curtailed, resulting in an almost unprecedented contraction in
global GDP. US unemployment reached a record 14.7% in April, while
analysts predicted that the US economy could shrink 30% annualised
in Q2 - the largest quarterly contraction since the Great
Depression. Thankfully, and in stark contrast to that earlier
period, policymakers acted swiftly with massive monetary and fiscal
stimulus, together with emergency legislation to support the
economy and financial system. Where early efforts did not have the
desired effect - such as the 50bp US interest rate cut and $700bn
QE programme in early March - policymakers simply delivered more
stimulus in order to prevent a cashflow crunch from developing into
a financial crisis. In the US, this saw the Fed cut rates by 150bps
and introduce unlimited QE while in Europe, the ECB launched its
own EUR750bn programme. Governments have been equally forthcoming;
in the US, the planned fiscal stimulus was $2.6trn (more than 10%
of GDP) while total announced German aid was equivalent to c.60% of
2019 GDP. This support, together with the tentative reopening of
certain European economies, saw markets rally into our financial
year end as focus shifted towards the perceived duration of the
downturn, rather than its depth.
Record gains for US stocks during April (the S&P rallying
more than 11% in local terms, its best month since 1987) proved a
fitting end to another year of US exceptionalism. While most
markets registered total returns between 0 and -11% in Sterling
terms, the S&P 500 delivered +4.5% with much of the divergence
explained by the outperformance of the technology sector (and more
broadly, growth over value) as investors gravitated towards stocks
able to deliver growth against a more uncertain economic backdrop
and during the final third of the year, sectors perceived to win
(or lose less) from COVID-19 disruption.
TECHNOLOGY REVIEW
The technology sector enjoyed an outstanding year of absolute
and relative returns with our benchmark, the Dow Jones World
Technology index, advancing 18.1% in Sterling terms. Technology
outperformance was at odds with weakening sector fundamentals as IT
spending increased by only 0.4% y/y during 2019, while sector
revenues and earnings grew just 2.8% and 0.8% y/y respectively.
However, this obscured the growing divergence between
next-generation and legacy companies, as well as the impact of
negative earnings from cyclical subsectors. However, it was
painfully apparent at the sector level with the performance of
software (+23%) and semiconductors (+20%) in contrast to hardware
(-3%) and networking (-11%). Regional performance was also
bifurcated with US large-caps, as measured by the Russell 1000
technology index, delivering almost twice the returns (+21%) of the
Dow Jones World Technology ex US index (+11.5%). The final months
of our year proved a boon for the sector as stay at home / social
distancing acted as a massive accelerant to a number of key secular
themes.
Next-generation software and payments stocks continued to
deliver exceptional growth during the year, although strong share
price performance was punctuated by an arguably overdue period of
valuation compression between July and December reflecting
profit-taking, higher bond yields and the debacle at WeWork which
caused a scare in long duration assets. Despite this, the digital
transformation imperative continued to drive demand for a plethora
of SaaS (software as a service) solutions including unified
communications (UCaaS), workflow automation, collaboration and
real-time monitoring. Microsoft continued to execute flawlessly,
solidifying its status as a new cycle winner. While strategic
M&A slowed during the year, private equity interest remained
robust with Sophos, LogMeIn, Instructure and Cision all acquired by
financial buyers which buttressed software valuations. Payment
stocks enjoyed a solid year, with Visa (+13%) and Mastercard (+12%)
benefitting from the transition from cash to card as well as
eCommerce-related growth.
The semiconductor sector suffered its first cyclical correction
this cycle during 2019, declining 12%, although excluding memory
(where pricing was weak) the contraction was c.2%. There were
pockets of strength including CMOS image sensors, MEMS microphones
and microprocessors (due to hyperscale capex and a PC refresh
cycle), but the most significant development during the year was
the permanent bifurcation of the global semiconductor supply chain
discussed in the outlook section. Hopes for a trade deal, together
with excitement around 5G and a better 2020 saw semiconductor
stocks post some of the strongest returns driven almost entirely by
multiple expansion.
5G related excitement and trade deal hope also helped Apple
(+54%) enjoy a remarkable year following its January 2019 profit
warning, its first in over a decade. During the year, the stock
benefited from a massive re-rating due to a number of positive
developments including stabilisation of smartphone supply chain
data, a better than expected iPhone 11 launch and continued growth
and focus on its services business. In addition, Apple's
accessories business posted strong growth, driven by AirPods
(Bluetooth wireless earbuds) that became mainstream with c.60m sold
during 2019. In addition, investors began to focus on prospects for
a significant iPhone replacement cycle in 2020 driven by the
expected introduction of 5G handsets.
Internet stocks experienced a mixed year with returns for most
of the year in stark contrast with robust fundamentals. Regulatory
risk became a reality as both the Department of Justice (DoJ) and
Federal Trade Commission (FTC) announced formal antitrust
investigations of the leading Internet platforms in June. In the
same month, Senator Elizabeth Warren - at the time a leading
contender for the Democrat nomination - raised the spectre of
"breaking up Big Tech" if she became President while in August,
France passed a 3% digital tax on sales for large Internet
companies. Despite these adverse developments, fundamentals at the
leading platforms remained strong, evidenced by online advertising
which grew 16% y/y in 2019. E-commerce trends also remained strong;
Alibaba's Singles Day event saw gross merchandise value (GMV)
increase 26% y/y while in the US, Black Friday online sales grew
c.20% y/y. Fundamentals and stock prices converged during the final
(coronavirus) phase of the year as the Internet subsector proved
one of the greatest beneficiaries of stay at home / social
distancing orders.
PORTFOLIO PERFORMANCE
Our total return performance came in modestly ahead of our
benchmark, our own net asset value (NAV) per share rising 18.6%
during the year versus a 18.1% gain in the Sterling-adjusted
benchmark. In the US, the most significant positive contribution to
performance was made once again by AMD (+96%) as the company
continued to execute on its product roadmaps, achieving its highest
server CPU market share since 2013. In addition, the portfolio
benefited from its overweight exposure to SaaS companies which
delivered strong growth against a more challenging economic
backdrop. Strongest performance was reserved for those with
solutions that helped facilitate work from home (WFH) such as
RingCentral (+104%), Everbridge (+56%) and Five9 (+54%).
The need to support remote workers also benefited
next-generation security companies such as Cloudflare (+39%) and
CrowdStrike (+32%) while social distancing measures helped the
likes of Amazon (+33%), HelloFresh (+84%), PayPal (+20%) and
Netflix (+18%). Stock selection was positive across all major
regions and nearly all marketcapitalisation tiers with the
exception of small-caps, which accounted for <2% of the
portfolio. Relative performance was also positively impacted by
underweight/zero positions in a number of index constituents
including Cisco, Broadcom, SAP, Oracle and DXC Technology which
struggled with cloud migration, cyclical sensitivity and/or
leverage. The portfolio also benefited directly from one corporate
action following the purchase of Tableau Software by Salesforce.com
at a 42% premium. This, together with a number of private equity
transactions helped support software valuations during the
year.
In terms of negatives, the most significant detractors were our
large but still underweight positions in both Apple (+54%) and
Microsoft (+44%). Apple enjoyed a banner year driven by AirPods,
services and a better than expected iPhone 11 launch while
Microsoft benefited from Office365 and Azure growth, with remote
work driving rapid adoption of Teams, its unified communication and
collaboration platform. In addition, a number of 2019 IPOs such as
Pinterest (-31%) and Uber (-37%) performed poorly as a result of
inconsistent growth and a loss of investor appetite for
long-duration assets. Relative performance was also hindered by a
number of other individual stock moves due to disappointing
earnings progress and/or valuation deratings such as Arista
Networks, 8x8 and Pagseguro Digital. Finally, our cash position
(which averaged 5.5%) also detracted from performance in what ended
up being another strong year for technology stocks. However, this
drag was almost entirely offset during the period of market
turbulence by strong gains in our NASDAQ put options that
contributed nearly 100bps to portfolio performance. During the
year, there was a significant divergence between large (+21%) and
small-cap (-3%) US technology stocks as measured by the Russell
1000 and 2000 technology indices.
Our thematic exposure was relatively stable for much of the
year, with most of the variation explained by adjustments for
stock-specific, 'bottom-up' reasons. The largest positive thematic
change was in mobility where we continued to increase our 5G
exposure via a combination of new purchases, such as Marvell and
Keysight, and the adding to of our Apple position. In contrast, we
decreased our exposure to industrial automation towards the end of
the 2019, taking profits in a number of stocks against the backdrop
of economic and end market (auto / smartphone) weakness. However,
in February / March, we made significant changes to our portfolio
to better position it for COVID-19 disruption. While not abandoning
every stock with economic sensitivity, we rotated away from
cyclical areas, including travel, payments, small and medium-sized
business (SMB) and advertising, as well industrial/ automotive and
associated robotics and semiconductor stocks. We also reduced
and/or sold stocks we felt might be negatively impacted by
behavioural changes, such as online dating, cinema, and rideshare,
as well as 'big ticket' software stocks with long implementation
cycles. We rotated into 'stay at home' beneficiaries within
ecommerce and cloud infrastructure such as Alibaba, Amazon, Netflix
and Spotify while purchasing several next-generation security
stocks including Cloudflare and CrowdStrike. We also added further
to 5G, while reducing our underweight exposure to the PC and server
markets, with remote work likely to drive near-term demand at home
and in the data centre. Towards year end, we began to transition
the portfolio towards stocks and themes that should fare well as
restrictions are eased and/or in the 'new normal'. This saw us
rebuild some of our industrial automation and payments exposure at
the expense of some of the early 'lockdown' winners such as video
gaming, as well as software as a service companies, especially
where valuations had fully recovered.
MARKET OUTLOOK
At the time of writing there have been more than 5.8m cases of
COVID-19 and more than 360,000 deaths reported globally, although
the case curve peaked or flattened in several of the worst affected
regions during April. The global economy is currently experiencing
its most severe contraction in modern history as governments across
the world have instigated lockdowns to slow the spread of COVID-19,
better prepare health systems and save lives. In the words of Fed
Chairman Powell, the "scope and speed of this downturn are without
modern precedent (and) significantly worse than any recession since
World War II". In April, the US economy lost an unprecedented 20.5m
jobs taking the unemployment rate to 14.7% while in the UK, 7.5m
people have been furloughed. The economic damage from containment
measures will be fully felt during Q2 with the US economy expected
to contract by as much as 40%, while in India, the virtual shutdown
has seen the services PMI fall to just 5.4, catastrophic given that
services account for more than 50% of India's economic output.
Globally, GDP is expected to contract by c. 9.8% in Q2'20, similar
in scale to but arguably broader in reach than the Global Financial
Crisis (GFC) of 2007-2009. Current IMF forecasts for 2020 expect
the global economy to contract by 3% before rebounding +5.8% in
2021 as economic activity normalises. However, the economic outlook
is "highly uncertain and subject to significant downside risks"
Our own outlook is broadly in-line with the current consensus
which (we believe) assumes a limited lockdown period (2-3 months)
that is followed by a recovery hampered by social distancing
restrictions ahead of a vaccine in 2021 beyond which things
'normalise'. During this time, policymakers are likely to do
whatever is required to preserve the financial system. Their
efforts thus far have been nothing short of spectacular. Interest
rates have been slashed to zero in nearly all developed economies,
while central banks have already expanded their collective balance
sheet by an estimated $4trn, led by $2.4tr from the Federal Reserve
(Fed). By the end of 2021, the G4 plus China are expected to have
increased their balance sheets by $13tr with the Fed and the ECB
balance sheets exceeding 50% of GDP. Unlimited QE from the Fed, the
world's lender of last resort, has effectively taken on private
sector credit risk. Fiscal stimulus has also been "eye popping"
with US efforts estimated at $2.6trn, close to double anything seen
in over a century with its flagship Coronavirus Aid, Relief and
Economic Security (CARES) Act worth c.9% of GDP and double the size
of the intervention following the financial crash in 2008. While
different countries have adopted varied approaches, total worldwide
stimulus has been estimated at $15tr to date, equivalent to c.17%
of the global economy last year.
We cannot know if this will prove sufficient, not least because
we have limited conviction in the recovery timeline and trajectory.
However, we fall back on our confidence in policymakers and their
desire to prevent a temporary paralysis from causing a Steinbeckian
downward spiral.
With interest rates at zero, and the proverbial 'monetary
bazooka' already unleashed, there is some nascent concern that
central banks could run out of ammunition. Having heard this
argument before during the GFC, we believe that more firepower will
be found if required even though the Fed has emphatically ruled out
negative interest rates, much to President Trump's dissatisfaction.
That leaves forward guidance, QE and yield curve control within the
Fed 'toolkit' but with markets already pricing in the zero-lower
bound (ZLB) for the next c. 5 years, only QE is a viable option
today. Thankfully, it appears to be working well with Treasury
buying already declining by 90% from its daily peak of $70bn.
As the world moves out of a lockdown phase, governments will
have to balance the risks of further escalations in COVID-19
infection rates with the risks of curtailing economic activity.
They must do this within the realms of what is politically possible
(which changes over time as well as differing by place), using
imperfect and sometimes contradictory information. The bridge
between the economic "medically-induced coma" that lockdowns
necessarily precipitated and some semblance of a 'back-tonormal'
economy is still a work in progress. However, economics and
crucially, a much lower infection fatality rate (IFR) than
initially believed, means that the lockdowns must end. We are
closely monitoring approaches around the globe and have currently
positioned our portfolio for a staggered reopening of the global
economy. This involves a balance of positions in companies that
will benefit from working and living at home (such as digital
entertainment and remote work) and those that will see trends
accelerate as the economy opens and evolves (for example industrial
automation and food delivery).
This approach reflects our reluctance to wade into the 'shape'
of the recovery debate ('V','U','W' etc.) although we suspect that
the V-shape recovery in equity markets is unlikely to be matched by
economies as they reopen, a view supported thus far by the
experience of China, which was first in, and first out of lockdown.
There, a combination of job losses, ongoing social distancing
measures, continuing concerns over health and higher precautionary
savings rates appear to be partially offsetting pent-up demand. The
CEO of McDonald's recently acknowledged that they were "not seeing
a V-shaped recovery in China", sentiment echoed by Fed Chair Powell
when he stated that there was "a growing sense that the economy may
recover more slowly than we would like". Instead, a "swoosh shaped"
recovery trajectory seems most likely to capture the lingering
effects of social distancing driven either by regulation or
self-enforcement. In addition, there are likely to be significant
changes to daily life that persist well after lockdown has ended,
some of which may prove permanent. Many of these involve
accelerated technology adoption to replace real-world activities
that are no longer possible nor desirable, a topic to which we
return later.
The persistence of this so-called 'new normal' depends greatly
on what happens next. If a vaccine is discovered tomorrow, most of
the COVID-19 related behavioural changes will disappear as rapidly
as they arrived to be remembered fondly in years to come like
wartime recipes for making cakes without eggs. However, the longer
it takes for a vaccine or antidote to be discovered, the less
likely it will be that we ever return to the world as it was. The
current consensus on when a vaccine might be discovered is between
12-18 months, a timeline reiterated recently by the top infectious
disease expert on President Trump's coronavirus taskforce. Under
normal circumstances, this timeline would be considered ambitious
at best given that it takes on average four years to develop an
entirely new vaccine. However, these are not normal times with at
least 254 therapies and 95 vaccines currently being explored while
the Gates Foundations and others are trying to address inevitable
manufacturing bottlenecks ahead of schedule. Unfortunately, the
experience of HIV - a virus that also permanently changed social
behaviour - is sobering given there is still no successful vaccine
after 40 years of effort.
Our base case is that a vaccine or antidote is discovered in
2021, but this may just be wishful thinking on our part, akin to
the popular view held in 1914 that 'war would be over by
Christmas'. However, should the timeline slip, all is not lost as
the HIV experience shows because despite the lack of vaccine today,
a "litany of antiviral drugs" has seen "a disease that was once a
death sentence become a chronic condition". Put differently,
COVID-19 may be something we cannot eliminate but as long as we
adhere to a suitable regimen it can be managed until a vaccine is
found or herd immunity achieved. That regimen will lean heavily on
social distancing, morbidity-related policy and living healthier
lives (given the strong link between obesity and COVID-19
outcomes). Although we do not know what final form the 'new normal'
will take, we are hopeful that our species will prove adaptable. So
far, the evidence is hugely encouraging.
Underpinning this relatively sanguine view is a creeping
realisation that COVID-19 is perhaps less deadly than initially
believed. Not so for older individuals and people with
co-morbidities but for the general population, and in particular
younger people. A recent WHO study suggested that up to 3% of the
world's population may have already had the disease, 9-10x more
than the number of reported cases. Although this remains a long way
from the 60% said to be required for herd immunity, it
significantly changes infection fatality rate (IFR) calculations.
In February, the team at Imperial College estimated the IFR at c.1%
but more recent studies suggest IFRs of 0.66% and 0.16%
respectively.
More importantly, they reveal the clear age-related severity of
the disease with over 60s more than 20x greater to die from
COVID-19 than those under 60. This is supported by data that
suggests that 95% of Italian deaths occurred in those aged 60 and
over, while 80% of the deaths in people aged 40 or less had serious
pre-existing conditions. This data strongly supports lifting
restrictions on an age-related basis and suggests that, with social
distancing in place and health systems better prepared, that risk
associated with a 'second wave' is likely overstated.
COVID-19 represents one of those generational moments when
normality is suspended. Usually, these are deeply personal moments
when the passage of time is interrupted by news of serious illness
or an unexpected development that changes everything. Once life
restarts, for some it simply snaps back to its earlier state. But
for many, the timeout allows them to recalibrate and focus on what
really matters to them. Our sense is that COVID-19 will result in
societal recalibration - permanent changes that persist long after
the pandemic - many of which will seem obvious in the fullness of
time. The success of work from home (WFH) together with challenges
to mass transit systems posed by social distancing means that many
of us are unlikely to work as we did previously. This may have a
profound and lasting impact on demand for commercial property,
coffee shops (as a 'third space'), business travel and even the
role of cities. Rather than trying to move people at high speed in
and out of business hubs (with HS2 expected to cost more than
GBP106bn) perhaps infrastructure spending should be redirected to
providing nationwide high-speed Internet. If we came to dominate
the world because sapiens were the only animal able to assemble and
cooperate flexibly in large numbers, then in a socially distanced
world the case for universal internet access has never looked
stronger.
In time, remote work could allow companies and people alike to
relocate anywhere with a good Internet connection, akin to how
containerisation eliminated the need for factories to operate near
ports. Hard fought freedoms may be surrendered in order to contain
future outbreaks with thermal cameras, quarantine and state-level
surveillance becoming the norm. Myriad industries (travel,
hospitality, retail, manufacturing, sport and fitness, communal
worship) may need to be reimagined in order to comply with social
distancing. The use of physical cash, how we greet friends and
strangers and perhaps most importantly, our relationship with our
planet all appear subject to change too. Perhaps the stark reality
of COVID-19 will allow us to address issues seemingly impossible
today, with the UK Prime Minister's own experience presaging a
renewed focus on obesity and healthier living. We are also likely
to see an acceleration in the trend of deglobalisation and
reshoring because synchronised demand for critical items such as
PPE and paracetamol, exposed frailties associated with global
supply chains. Relying on India and China for 84% of the world's
paracetamol now not only looks incredibly reckless but may embolden
those who believe capitalism requires closer supervision.
MARKET RISKS
The principal near-term risk to our base case is a material
setback in the recovery timeline that challenges the critical
assumption that policymakers will do whatever is required to
prevent another Great Depression. This could come in many forms -
widespread corporate failure and job losses, a more aggressive
mutation of the virus or a deadlier 'second wave' of infections as
was the experience during the Spanish Flu. Any loss of confidence
in the ability of policymakers to deliver economic safe passage
would be catastrophic and difficult to reverse. Recent travails in
energy markets are a good reminder that some COVID related
imbalances lie beyond the scope and remit of central banks and
monetary policy. The absence of 'light at the end of the tunnel'
would force investors to refocus on the present. This could result
in inequality-driven social unrest as the impact of COVID-19 falls
disproportionately on lower-paid workers and potentially result in
significantly more social unrest.
We should also consider elevated equity valuations that might
already capture much of the recovery upside. The combination of
negative earnings revisions and rebounding equity markets has taken
the forward PE on US stocks to 20.3x (2019: 16.8x), well above five
(16.7x ) and ten-year averages (15.1x). With current estimates for
revenue and earnings growth in 2021 at 8.6% and 27.3% respectively,
another key risk relates to an earnings recovery that falls short
of expectations. This could happen for macro reasons - worse than
expected job losses and corporate failures - but also because
companies have to absorb new costs associated with social
distancing / WFH or decide to pay their workers more. Others (like
Amazon) look to invest the upside associated with the crisis in
order to do 'the right thing' or perhaps reduce the risk of
potential windfall taxes.
The resumption of trade war uncertainty also represents a very
significant risk to the recovery. While neither side will want to
jeopardise their phase one deal until the global economy is on
firmer footing, President Trump has been highly critical of China's
response to COVID-19, referencing it as the "China Flu" or worse.
The Trump Administration is said to have drawn up a long-term plan
to punish China for allegedly concealing the virus from the world.
While measures are said to potentially include sanctions and
cancelling US debt obligations, thus far the US has simply dusted
off its trade-war playbook. However, its recent requirement that
overseas chipmakers using US technology will need to seek
government approval before shipping to Huawei represents a
significant escalation in trade tensions which are unlikely to
dissipate while the gulf between the US and Chinese experience
continues to grow, evidenced by a US death toll now 15x greater
than China's.
With a number of other countries including Australia, Brazil and
the UK are clearly angered by Chinese obfuscation, there will be an
inevitable longer-term recalibration of the world's relationship
with China. This may be limited, or it could be part of a wider
process of deglobalisation with the crisis not only exposing the
frailties of comparative advantage but also exploding the myth of
global cooperation. In contrast to the global financial crisis when
G20 leaders pledged not to resort to protectionism, COVID-19 has
been characterised by the ungainly pursuit of national interests.
Open borders have been shut and international cooperation
suspended. Supranational organisations such as the WHO have been
found wanting, neutered, like the United Nations (UN), by the need
to reach an international consensus. The commandeering of PPE laden
lorries heading to the UK by the French will have done little to
smooth ongoing Brexit negotiations. Likewise, the ability of the
British to print "helicopter money" - an option not available to
Italy or Spain - will not have been lost on other eurozone
members.
Having already withdrawn from a number of high-profile UN
organisations, the recent US decision to withhold funding for the
WHO and suspend the issuance of 'green cards' looks increasingly
reminiscent of the 1930s isolationism which also followed economic
dislocation. US withdrawal from the world stage would
(intentionally) upset the status quo, create trade friction and
heighten political risk with vacuums left by US disengagement
likely to be filled by China, Russia, Turkey or Iran. Much depends
on the outcome of the US Presidential elections in November; while
a Biden victory would ameliorate this risk, it would introduce
others including higher taxes to pay for an Obama-style healthcare
plan costed at $750bn over ten years. At the time of writing,
President Trump is still expected to win re-election, but that
could change in the coming months.
There are a number of other downside risks to consider. These
include a potential future inflation shock following record
monetary financing of government budget deficits. While this would
certainly be one way to alleviate the record amount of debt that
exists today, the record stimulus is offsetting haemorrhaging
demand while inflation expectations are currently languishing near
record lows. As such, deflation continues to represent the greater
threat with Japanification - a low growth world swimming in debt
cheap to service but unlikely to ever be repaid - looks more likely
than hyperinflation, but that might have also been the prevailing
thought in Germany after WWI. Wages could surprise to the upside
due to deglobalisation and/or lower levels of future migration,
while post-war experiences have often seen labour demand more of
the economic spoils. And then there is the thorny question of who
is going to foot the bill for the $10trn of stimulus.
There are also upside risks to consider. The early discovery of
a vaccine would result in rapid normalisation which, together with
unprecedented stimulus could result in a melt-up. Although equity
valuations may appear to capture much of the upside, it is
difficult to know what the right price for something is when US
risk free rates are near zero with ten-year US Treasuries yielding
less than 100bps at time of writing. On a relative basis, equities
look attractive compared to bonds and cash where negative real
returns appear highly likely. We may also be positively surprised
by the recovery trajectory with only 10% of investors currently
expecting a 'V-shaped' recovery. Likewise, with more than
two-thirds of investors characterising current market strength as
merely a bear market rally, current positioning appears to confirm
that the proverbial 'pain trade' remains up.
TECHNOLOGY OUTLOOK
After a difficult 2019 for IT spending, hopes for a better 2020
were cut short by COVID-19 and the global downturn. In January,
growth had been pegged at +3.5% y/y but today, worldwide IT
spending is expected to fall to $3.4trn in 2020, representing an 8%
y/y decline in dollar terms. Likewise, technology revenues and
earnings that made little overall progress in 2019 are expected to
increase by 2.3% and 1.4% respectively in 2020. However, this is
significantly better than forecasts for the S&P 500 with
revenues and earnings expected to decline by 3.8% and 20.3%
respectively.
First-quarter earnings season has been supportive of this
bifurcation with 73% of technology companies delivering revenues
ahead of expectations compared to 57% for the S&P 500. Relative
technology strength is expected to continue in Q2 (when the impact
of COVID-19 will be more fully felt) with technology revenue growth
pegged at -1.2% y/y compared to -11.3% for the broader market. The
combination of positive sector returns and negative earnings
revisions saw the technology sector continue to rerate over the
past year leaving it trading on a forward PE of 22.5x as compared
to 18.9x at the previous year end. This represents one of the
highest forward multiples enjoyed by the sector since 2005 and is
well ahead of five (17.8x) and ten-year (15.4x) averages. However,
the sector's relative rating represents only a c.5% premium to the
broader market (2019: 8%), ignoring its balance sheet strength. In
early February, this premium exceeded 20% but has been ameliorated
by subsequent earnings revisions that have been less negative than
the broader market. Today's modest premium looks well supported by
the sector's relative earnings profile, profitability (net margins
that in Q1 were twice that of the S&P at 20.8% and 9.4%
respectively) and balance sheet strength. As in previous years, the
technology sector is unique in boasting net cash.
Our view last year that a Nifty Fifty type market would persist
was borne out as investors continued to be drawn to growth stocks
against the backdrop of a sub-par global economy and lower
risk-free rates. This remains our view for the same key reasons,
with COVID-related disruption creating an even greater distinction
between winners and losers from technology disruption. The market
may feel uncomfortably thin and there are definite pockets of
valuation exuberance emerging, but this is entirely consistent with
our view that leadership rarely changes during a late-stage bull
market. The remarkably flat yield curve should also continue to
support technology outperformance versus financials. Finally, there
is the real possibility of a 'melt-up' scenario with COVID-19
delivering the regulatory and behavioural change (social
distancing) that accelerates adoption of next-generation
technologies, propelling valuations of stocks that perfectly
capture the zeitgeist into new and potentially uncomfortable
territory.
ACCELERATED INNOVATION
Thus far the technology sector has fared relatively well during
the crisis, initially due to its defensive characteristics - strong
balance sheets, high margins and recurring revenues. However, the
sector has also proved its criticality to the global economy in the
gloomiest of circumstances while ameliorating the economic and
social consequences of COVID-19. This is hugely gratifying,
particularly as we recently passed the inauspicious milestone of
the 20-year anniversary of the bursting of the dotcom bubble in
March 2000. After that false start, the Internet has delivered on
its earlier promise as a general purpose technology creating
massive new market opportunities and widespread disruption, with
COVID-19 and associated social distancing accelerating both. With
budgets pressured, CIOs have moved to something akin to a 'war
footing' prioritising 'mission-critical' spending in order to
support remote work and changing user behaviour.
There is nothing quite like a crisis to spur innovation,
necessity being the mother of invention. During the Second World
War - arguably one of the most analogous periods to the present one
- technology innovation was greatly advanced across myriad fields.
Healthcare was forever altered by the mass production of
penicillin, as well as mass immunisation for tetanus. The world's
first digital computer - the Colossus I - was deployed by the
enigma code breakers at Bletchley Park. Jet engines used in fighter
aircraft revolutionised aviation while advances in rocketry
presaged the Space Race. Radar technology led to more accurate
weather forecasting while Motorola's backpack walkie-talkie was
born on the battlefield, alongside synthetic rubber, morphine,
EpiPens and blood plasma.
Just as that early crisis accelerated technology innovation and
the roll-out of modern infrastructure, so we expect COVID-19 to
drive rapid adoption of cloud computing upon which modern software
and Internet services sit. The kernel of the new technology cycle,
the public cloud had become the default platform for compute and
storage well before COVID-19 accounting for (we estimate) between
20-25% of workloads. While public cloud growth had been pegged at
between 21-31% over the next three years, the need to support
remote work and learning, telemedicine, over-the-top video,
streaming gaming and an e-commerce boom has left these forecasts
looking stale. In Q1, market leader AWS grew revenues by 37% y/y,
Microsoft Azure saw sales increase 61% y/y in constant currency,
while the combination of Google Cloud and G-Suite grew 52% y/y.
Accounting for just 4-5% of total IT spending today, cloud
infrastructure and software are likely to take substantial share
over the coming years*. This will come at the expense of legacy
technologies that are unable to support or secure remote work while
exploding the myth of hybrid cloud (the idea that cloud and
on-premise compute coexist) the de facto state of computing
today.
In previous years, we have used parallel developments in other
industries to (hopefully) bring to life the changes occurring
within technology today. Last year, we used cars and horse-drawn
carriages in the early 1900s to highlight how coexistence is merely
a temporary state during which time new technologies complement
before replacing legacy ones. We also charted the history of
shipping containerisation in order to convey how modern software
architectures would change the scale, speed and scope of
technology. This year we draw on the parallel of television which
we have explored in the "TV Guide" sent to Shareholders with the
Annual Report.
Internet stocks have proved one of the most significant
beneficiaries from COVID-19 although this benefit has not been
evenly distributed. Worldwide e-commerce sales were expected to
increase 19% y/y in 2020. However, with normal life curtailed,
virtual alternatives have never been more attractive resulting in
average online transaction volume rising 74% in March. Few
companies were better positioned than Amazon; it reported a 26%
increase in Q1 revenues while adding 175,000 employees to help meet
soaring demand. In China, Alibaba grew revenues by 22% y/y while
reaching $1trn of gross merchandise value (GMV) in the year to
March. Categories that have benefited most include clothing,
furniture and food delivery. Nascent categories such as online
grocery (c.2% penetrated prior to COVID-19) and connected fitness
have fared particularly well, with social distancing not only
accelerating adoption but also potentially expanding addressable
markets. During Q2, gym closures helped Pelaton grow sales 66% y/y,
Ocado retail revenue increased more than 40% y/y while 41% of US
shoppers that bought food online early during the lockdown had
never done so before. Brands are following their customers online
and building ecommerce-enabled websites that allow them to control
the retail experience and establish direct-to-consumer (DTC)
relationships.
However, not all categories have benefited. Online travel -a
vertical we had avoided due to its relative maturity - has been
ravaged by the lockdown. Both Booking.com (not held) and Airbnb
(private) have seen revenues decline by c.85% y/y with "minimal"
evidence of recovery thus far according to Mastercard May travel
volumes. Faced with an "existential struggle", travel companies
have tapped capital markets to shore up balance sheets while
valuations have plunged. This includes former darling Airbnb said
to have recently raised money at a $18bn valuation having been
expected to be worth $42bn at IPO this year. Weaker travel trends
have also significantly hurt ride-share companies such as Uber and
Lyft, delaying Uber's timeline to profitability while both
companies have announced large workforce reductions. Data from
reopened markets suggest that any travel recovery will be gradual
and likely to involve different consumption habits (e.g. more
domestic travel via car) until confidence is fully restored and/or
a vaccine is found. We continue to sport large absolute positions
in flagship e-commerce companies Alibaba and Amazon augmented with
smaller holdings. These include those held before the crisis -
Ocado, Meituan Dianping, Peloton and Uber as well as new purchases
such as Autotrader, TripAdvisor and Zalando.
We have also added exposure to media content with the lockdown
accelerating adoption of streaming video and music. Intensifying
OTT competition that dominated the headlines in 2019 was soon
forgotten as video streaming "became everyone's favourite pastime
during quarantine". Consumers streamed 13.2bn hours in Q1'20, an
increase of 49% y/y while Netflix added 15.8m subscribers in Q2,
well ahead of the 11m expected by the Street. Having won the
attention of Generation Z, short-form video has captured the
zeitgeist of the lockdown with Tik Tok (owned by China's ByteDance)
experiencing more than 200m downloads during Q1'20 with weekly
average usage reaching 6 hours per week. In contrast, prime-time TV
viewing fell 18% y/y among 18-34-year olds between March and April
suggesting that 'cord-cutting' is accelerating. The pandemic has
also exploded the myth that video is a 'winner takes all' market
with the second wave of
competition arguably accelerating the demise of linear TV.
The same might also be said for music with stay-at-home orders
leading to a surge in listening hours which, according to Sonos,
increased 48% y/y in April while Spotify added 10m premium
subscribers during Q1, taking its total to 130m. We continue to
gain media exposure via mediumsized positions in both Netflix and
Spotify and via Alphabet, which owns YouTube.
Unsurprisingly, the outlook for online advertising is less
positive reflecting the slowdown in overall consumer spending,
especially within the travel vertical. However, declines have been
shallower than feared to date, aided by relative strength in direct
response advertising (echoing the shift to ecommerce) and
significantly higher usage of social media and messaging platforms.
At Facebook, monthly active users (MAUs) across its 'family of
apps' reached 3bn for the first time in March while in countries
hardest hit by the virus, messaging and voice/video calling
increased by more than 50% and 100% respectively. Soaring usage
allowed advertisers to achieve higher ROIs and Facebook to deliver
constant currency (cc) revenue growth of 19% y/y. Alphabet (Google)
also performed better than feared with constant currency revenue
growth of 15% y/y, aided by search usage which at its peak was four
times the peak of Super Bowl search activity.
The resilience of both platforms highlighted how under-monetised
they are now that millions of companies need to find customers
online. At Facebook, there are 140m small businesses using free
tools but only 8m that currently advertise on the platform. Without
a similar surfeit of would-be advertisers, smaller platforms like
Pinterest and Twitter struggled to monetise strong engagement
trends. While we expect the advertising outlook to remain highly
uncertain, we have been pleasantly surprised by relative strength
at Facebook and Google and have added back to each, as well as to
Tencent, the leading social networking platform in China. We are
also excited about the potential of so-called social commerce as
social networks move away from lead generation towards the final
transaction, a trend likely accelerated by COVID-19.
While the pandemic has benefited the Internet subsector, we
remain alive to the regulatory risks that could yet overshadow
robust fundamentals. These risks relate to a number of different
areas such as data protection, with the California Consumer Privacy
Act (CCPA) the latest attempt to strengthen consumer rights
relating to data collection. While this may (like GDPR) again
benefit the platforms with the largest daily audiences at the
expense of smaller players, antitrust risk is aimed squarely at the
internet giants. This risk took shape in July 2019 when the DoJ
formally announced it had opened a broad antitrust review of
market-leading online platforms while Facebook later revealed that
the FTC had launched a similar investigation into the company in
June. Potential implications range from fines, new regulations on
business practices or a breakup in a worst-case scenario, although
this outcome appears less likely now with Biden as Democratic
candidate for President. A series of long and drawn out inquiries
look inevitable. Higher taxes represent another risk with the OECD
having proposed a new international corporate tax system in October
in order to prevent countries such as France and the UK
unilaterally applying digital sales taxes. Finally, labour laws
that tighten the definition of independent contractor, such as the
California Assembly Bill 5 (AB5) legislation which went into effect
on 1 January 2020 may threaten the "two-way flexibility" essential
to the so-called Gig Economy.
We remain relatively sanguine about most of these risks. While
the 'second Gilded Age' argument was always beguiling, it is
fallacious to simply compare the market shares enjoyed by Google
today with Standard Oil in the early 1880s, a view strongly
supported by the current crisis. Not only have the large technology
platforms greatly ameliorated the impact of COVID-19, but many have
done everything possible to avoid profiting from it. In Q2, Amazon
prioritised lower margin 'essential' products while reinvesting all
of its operating income on COVID-19 related costs, including higher
wages, PPE and testing capabilities. Likewise, Google Classroom - a
free educational tool - was used by 100m students and educators in
March. Even as the munificence of technology companies fades in the
minds of policymakers, the crisis has revealed how network effects
can quickly create natural monopolies by design or otherwise.
Should Google be applauded for helping to keep schools open, or
castigated for competing unfairly with free products? Likewise,
will Zoom be investigated in years to come for offering free
videoconferencing to hundreds of millions of people during the
crisis? After two furious decades that have seen the internet
radically rewire our societies, we may be overdue a period of
consolidation and some recalibration. But this will not be easy for
policymakers to deliver, particularly as the US internet giants
represent the vanguard of American efforts to stay ahead of the
Chinese in any potential 'technological cold war'. They may have to
settle for higher taxes.
The crisis is likely to represent a turning point for the
payments industry, accelerating secular trends in banking and
digital payments at the expense of cash and incumbents. While
previous crises have typically resulted in people hoarding cash,
COVID-19 has seen consumers and businesses eschew it and the
physical contact it requires. In the UK, cash usage halved in just
a few days during March replaced by safer and quicker contactless
payments that now account for nearly half of all in-store
transactions between GBP30-50. The rapid adoption of e-commerce has
also been hugely beneficial, with Adyen (not held) posting a 34%
surge in Q1 revenue while PayPal saw payment volumes increase by
more than 20% y/y during April. Greater use of digital services and
fintech alternatives have also led consumers to reappraise their
relationship with banks. Over time, this could leave traditional
banks as 'dumb balance sheets', fit only to provide capital via a
customer relationship owned by the fintech companies..
The recent inclusion of Square, PayPal and other non-bank
finance companies in disbursing rescue loans for small businesses
is testament to their unparalleled reach and speed, Square Capital
was able to get a loan to a business in under 24 hours. Square has
also experienced skyrocketing demand for its peer to peer payment
app such that the term Cash App is now included in more than 2000
hip hops songs! However, COVID-19 has been far from unequivocally
positive, hurting remittance and cross-border volumes (an important
profit pool for the payment networks) and reducing overall
spending. It may also accelerate the arrival of new competition in
the form of 'big tech' with their large and engaged users bases and
strong technology capabilities. Despite this, we remain excited
about payment pure plays, our enthusiasm moderated only by elevated
valuations that already embed some of the post pandemic
opportunity. We currently hold PayPal, Mastercard, Visa, and Square
while our positions in Tencent and Alibaba provide exposure to the
two most important Chinese mobile payment assets, WeChat Pay and
AliPay.
Videogaming has been one of the more obvious beneficiaries of
stay-at-home orders, with Steam (the leading PC video game
distribution service) recording its peak concurrent player record
in early February (18.8m). Likewise, Activision Blizzard's
free-to-play Call of Duty Warzone released in early March reached
30m players in just 10 days. Any doubt about whether soaring
engagement would prove monetizable was answered emphatically in
April when NPD revealed US spending on video games had increased
73% y/y. While strong Q1 results from most of the major publishers
was accompanied by lukewarm guidance, this may prove conservative
as elevated levels of spending have continued into mid-May.
Although we cannot know what usage reverts to post-lockdown, there
are a number of secular drivers yet to fully unfold. These include
margin-rich full game downloads while Sony and Microsoft are due to
launch new consoles for the first time since 2013. Streaming gaming
may not yet be ready for primetime (evidenced by a mixed start for
Alphabet's Stadia) but may prove a hidden beneficiary of
WFH-related investments in broadband and home networking given that
user experience is beholden to the stability and speed of one's
internet connection. In time, streaming could dramatically increase
the addressable market for publishers by opening-up AAA titles to
more than 2.5bn mobile gamers.
Although esports and virtual reality (VR) have long represented
incremental medium-term opportunities, COVID-19 and the shuttering
of live sport and entertainment represents a unique 'break-out'
opportunity for both technologies. Unlike conventional sport,
esports have continued largely uninterrupted, helping Twitch grow
its audience by an estimated third in March alone. It has also seen
a blurring of real world and esports; this year the Grand National
was digitally simulated and watched by almost 5m viewers while
Formula 1 has hosted virtual Grand Prix (GP) in lieu of scheduled
events. More interesting still are crossover events that have
pitted virtual racers against real-life ones. This blurring is most
evident at Fortnite which recently hosted a Travis Scott concert
within a violence-free map called "Party Royale" viewed by 12.3m
concurrent players and screened a preview of Christopher Nolan's
upcoming movie Tenet. Both events demonstrate that "online games
can be places too", particularly with stadiums and cinemas closed.
For VR, the COVID-related opportunity could not be coming at a
better time with current headsets finally beginning to deliver on
the promise that led Facebook to acquire Oculus for $2.3bn in
2014.
With only 5.5m units sold in 2019 (flat y/y) it is easy to
understand why early euphoria has been replaced with healthy
scepticism. However, VR may be on the cusp of a second coming. In
April, almost a million new people registered with SteamVR
following the release of Half-Life: Alyx, a VR AAA first-person
shooter in March. Game reviews have been outstanding with
motion-sickness and fatigue associated with VR seemingly absent.
Facebook's VR business has also exploded higher in Q1 with
nonadvertising revenue "driven largely by sales of Oculus products"
increasing c.80% y/y. Rumours that Apple plans to roll out its own
VR headset in 2021 or 2022 were followed by news in May that it had
acquired NextVR, a live event broadcasting platform. In our
opinion, VR represents a way for live entertainment to reach an
audience while physical venues remain shut, or severely restricted.
However, as Fortnite has demonstrated, in time these virtual
audiences could dwarf anything that the real-world might deliver.
We currently hold several videogaming plays (Activision, Nintendo,
Take-Two, Tencent) while Facebook and smallcap Tobii Technology
(maker of eye-tracking systems) provide us with VR exposure.
Much has already been written about the so-called work from home
(WFH) beneficiaries, those companies and technologies without which
remote work would have been impossible. While COVID-19 triggered
"the world's biggest work-from-home experiment', the foundations
for this 'experiment' were laid during the past decade which has
seen remote work increase 400% thanks to the internet, the advent
of cloud software and changing attitudes of employers. Before this
crisis began, more than one third of US employees worked remotely
at least once a week, up from less than 10% in 2010. Just as 9/11
saw companies completely rethink their disaster recovery plans, so
COVID-19 is likely to have profound ramifications for patterns of
work. These will play out over different timeframes much as deeper
changes post 9/11 (such as greater state-level surveillance)
continue to reverberate today.
The most significant WFH winners are likely to prove cloud
software companies focused on communication and collaboration,
epitomised by videoconferencing company Zoom (not held) which has
seen its number of daily participants soar from 10m in December to
300m in May. Other platforms have also witnessed dramatic growth
including Microsoft Teams with 75m daily active users (+70% m/m in
April) and Google Meet which recently reached 100m daily meeting
participants. These numbers are remarkable given that there are
said to be 1.25bn knowledge workers worldwide. Cloud communications
platform Twilio (which allows developers to add voice, video and
messaging to their applications) has been another notable
beneficiary growing revenues 57% y/y while RingCentral, a leading
unified communications vendor increased Q1 sales by 33% y/y.
Twilio's success reflects the even more pressing need for companies
to engage digitally with their customers with traditional channels
closed.
Despite a usage-based model that should have left it exposed to
an economic downturn, the company instead beat expectations as new
use-cases emerged for its platform. These include telemedicine,
with Twilio winning the likes of Epic who "built and scaled its
video client at unprecedented speed" to facilitate virtual / remote
communication between patients and physicians. With COVID-19
forcing the issue, telemedicine in the US is now expected to grow
at a 38% CAGR through 2025. Other areas that have defied
expectations thus far include contact centre software where
cloud-based solutions have allowed companies to handle massive
inbound call volumes despite disruption to their physical call
centres.
Adoption also appears to be inflecting positively in
nextgeneration security (as compute shifts beyond the firewall),
critical event communication (enabling companies and countries to
communicate with their employees and citizens), and in the use of
digital signatures. There are also a number of legacy areas such as
VPN and remote access that are enjoying a second wind as some
companies revert to well-known technologies able to support the
surge in remote workers.
However, these may prove little more than stop-gap solutions
should work patterns remain permanently altered by the pandemic, as
seems likely. Instead of snapping back to its previous state, the
"unexpected success" of WFH has shown people can work remotely and
remain productive. Employees appear to have 'enjoyed' the
experience too, no longer having to commute, saving time (59
minutes per day on average in the UK) and money while helping the
environment. A recent Gartner survey revealed that nearly
three-quarters of CFOs plan to shift at least 5% of previously
on-site employees to permanently remote positions post-COVID 19.
However, this belies significantly greater change within a segment
of the market with nearly a quarter of respondents expecting to
move at least 20%. Several US technology companies have gone
further still with Mark Zuckerberg predicting that 50% of Facebook
employees could be working remotely within the next 5-10 years
while Twitter has announced that anyone not required to be
physically present in an office would be able to work from home
permanently.
While the future of work is unlikely to follow a model set by
Twitter, it may borrow heavily from technology companies. A
wholesale move to the cloud will be required to support
next-generation applications and significantly more remote workers
with next-generation content delivery networks (CDNs) such as
Cloudflare helping to accelerate and secure the additional Internet
traffic. Security will move increasingly beyond the corporate
firewall. Collaboration tools from the likes of Atlassian -
commonly used by software developers - are likely to become more
widely deployed in order to coordinate work across teams separated
by distance and time-zones. Business processes will be streamlined
and increasingly automated, helping the likes of ServiceNow. Remote
workers will need access to fast broadband at home, just as
commuters require cars or access to public transport. However, the
critical role played by software in facilitating remote work has
not gone unnoticed with high growth SaaS valuations currently
trading at c.20x forward sales. While we remain structurally
overweight, software is unlikely to prove immune to a downturn. As
such we have pared our exposure into strength in favour of cheaper
'new normal' alternatives.
One of these appears to be robotics and the broader industrial
automation (IA) space. After a difficult 2019 that saw the global
industrial robotics market shrink by 6.1% y/y there are a number of
potential drivers that could reinvigorate growth. Near-term, the
shift toward ecommerce and omni-channel retail should continue to
support demand for automated warehouses. Likewise, the need to
restart work while complying with social distancing may prove a
boon for machine vision, collaborative robots and automated guided
vehicles. In addition, supply chains are being rethought as a
result of the pandemic with the PPE debacle and trade-war concerns
likely to drive further reshoring well after COVID-19. This will
require more IA in order to ameliorate the impact of higher labour
costs.
We are also intrigued by the role that thermal cameras (able to
track people's temperature from a distance) will play in restarting
the economy. Not just in warehouses where Amazon has been an early
adopter, but also in offices, shops, stadiums, hotels and airports
where they may be linked with access control systems. Not only are
current trends encouraging - some factory automation companies have
seen demand increase 30% y/y - but history suggests that
recessionary periods tend to speed up the process of labour
automation. We have added a number of new positions including
Fanuc, FLIR Systems, Teradyne and Yaskawa Electric to long-held
favourites - Cognex, Fuji Corp, Harmonic Drive and Keyence.
Like robotics, the semiconductor sector should continue to
benefit from a number of secular tailwinds as well as a recovery in
the global economy. We are particularly excited about AI-infused
growth in data processing power. To date, the prohibitive cost of
data processing has resulted in only 1% of data created by human
beings being analysed. However, machine learning (ML) is
significantly lowering the cost of analysing unstructured data such
that Gartner expects computational resources used in AI to increase
5x from 2018 to 2023. We have exposure to this rare multi-year
structural growth story via NVIDIA, Samsung, TSMC and Xilinx. 5G
represents another key driver, and in our minds the next frontier
for the semiconductor industry as the enabler of new applications
based on machine-to-machine and machine-to-human communication.
Ultra-low latency intrinsic to 5G will enable the proliferation of
the Internet of Things (IoT), dramatically challenging the
convention of how data is created, stored and analysed. Gartner
believes that 5G represents a $30bn incremental revenue opportunity
for the semiconductor industry between 2019-23 which we hope to
access via our positions in Advantest, Hirose, Mediatek, Xilinx and
Qualcomm.
We also continue to favour companies that benefit from Moore's
Stress such as AMD which has continued to take market share from
Intel in the all-important server market. We also like its foundry
partner TSMC and the lead it now enjoys over Intel in leading-edge
geometries. Semiconductor production equipment (SPE) vendors are
likely to continue to benefit from rising capital intensity
associated with Moore's Stress too. However, SPE fundamentals are
likely to more closely track the bifurcation of the global
semiconductor supply chain which began in earnest last year.
China's semiconductor ambitions were made clear in 2015 when it
launched Made in China 2025 long before trade tensions began.
Designed to achieve self-sufficiency for its domestic semiconductor
industry, the end of Moore's Law presented China with the
opportunity to narrow the technology gap. However, escalating
technology rivalry has become a fault-line in US-Sino relations and
last year, led to the Trump administration placing Huawei and other
Chinese technologies companies on the Entity List. COVID-19 has
rekindled the issue, with the US now requiring foreign chipmakers
using US capital equipment to get a licence in order to sell to
Huawei, and TSMC - presumably avoiding having to 'choose sides' -
announcing it would build a $12bn leading-edge fab in Arizona.
We expect worst case scenarios to be avoided, with both the US
and China instead creating their own distinct supply chains.
However, in time this may set the scene for a "technological cold
war" just as British and German rearmament was a prerequisite for
WWII. For now, Huawei is likely stockpiling chips like it did in
2019 contributing to heightened inventory levels which, at the end
of the first-quarter, equalled 60 days - a ten-year record for Q1.
While the creation of twin supply chains is likely boosting overall
demand today, it poses significant medium-term risks to some of the
structural improvements made by the industry including the lower
revenues and EPS declines in downturns driven by supply
consolidation and pricing discipline. We are also mindful of the
challenging macroeconomic backdrop and the maturity of a number of
key end markets leaving us underweight the subsector.
The most important of these is smartphones which last year
accounted for c.1/4 of the overall semiconductor market. In 2019,
smartphone units declined 2% y/y as a stronger than expected iPhone
11 cycle was insufficient to offset longer replacement cycles and
greater sales of refurbished devices. Trade-war uncertainty
(particularly the US ban on Huawei) and a pause ahead of 5G
handsets due in 2020 played a part too. However, moribund
fundamentals were shrugged off by investors as focus shifted to 5G
and the potential for an 'overdue' upgrade cycle. Unfortunately,
early expectations for +3% unit growth in 2020 have been revised
sharply lower with units now expected to decline by as much as 23%
this year. However, replacement cycles look set to extend further
to 45 months which could set up 2021 as a strong recovery year.
Much depends on the 5G timeline and how much resonance the devices
have. Current expectations are for c. 210m units this year, rising
to 1.15bn by 2024, although disappointing sales of the flagship 5G
Samsung Galaxy S20 do not auger well. Industry maturation leaves us
underweight smartphones with most of our exposure explained by
Apple and Samsung who between them are believed to capture nearly
100% of industry profits.
Apple remains one of the most remarkable companies we have ever
encountered, a view reinforced last year as the company managed to
add $557bn to its market capitalisation despite smartphone units
declining y/y for the first time. This reflected ongoing success in
reducing its sensitivity to iPhone sales similar to the experience
of Microsoft which years ago changed how it licensed its software
to sever the link with new PC sales. While stock gains were driven
by a re-rating, it was accompanied by revenues that have become
more recurring in nature. Not just in terms of 'services' (which
continued to grow nicely) but in the form of an estimated 60m
AirPods that shipped during the year (+100% y/y). This reminded
investors of Apple's ability to create (and dominate) new product
categories to sell to its adoring, mass-affluent audience with
regularity. The Apple ecosystem was alive and well running into a
5G iPhone upgrade cycle.
Unfortunately, supply chain disruption presaged Apple's second
profit-warning in as many years which morphed into a demand issue
as the coronavirus crisis deepened. However, the company was still
able to grow revenues last quarter (+0.5% y/y) despite iPhone sales
declining by 7%, driven by further AirPod strength and services
that increased +17% y/y. While COVID-19 has seen Apple stop
providing guidance, it has continued to return capital to its
Shareholders via dividends and share buybacks unlike many others,
reflecting its unusually strong balance sheet and ability to
generate cash. Over the past five years, the company has returned
more than $300bn while reducing its share count by c.20%. Although
we have some reservations about the size and age of the iPhone
installed base (due to a large portion of devices being second-hand
or hand-medown) we are positive about the upcoming 5G cycle, even
if mass production is delayed modestly. We are also excited about
Apple's positioning in areas where trust is critical such as
e-health and payments where Apple Pay already accounts for 4-5% of
global card transactions, as well as optionality associated with
emerging technologies such as VR and AR. However, Apple's
medium-term growth rate is likely to trail our portfolio average,
while its disproportionate China exposure represents a significant
risk should relations between the US and China sour over trade,
COVID-19 or the status of Hong Kong. As such, we expect to maintain
our large, but underweight Apple position.
In the years ahead, we expect Artificial Intelligence (AI) to
increasingly take on the baton from the cloud and smartphone,
driving innovation and disruption across myriad industries. As
such, AI remains highly strategic, evidenced by another record year
for M&A and fund-raising with 231 AI-related deals consummated
while 2,235 transactions raised $26.6bn for AI start-ups. AI
continues to advance at an astonishing pace with a major milestone
reached in natural language understanding (NLU) when a model from
the Google AI Brain team achieved 'superhuman' performance in June
2019. Since then, other teams from the likes of Baidu, Alibaba,
Microsoft and Facebook have done the same. In natural language
processing (NLP), Microsoft has been working on a transformer-based
generative language model (T-NLG) aiming to let machines generate
words to complete unfinished sentences based on context, respond to
a question with direct answers and summarise an article precisely
like humans. In order to achieve this, its model features 17bn
parameters to learn from essentially all of the text published on
the internet, compared to c.26m used in a typical image recognition
model.
Requiring extremely low latency during the inference process
given the response gap in natural conversation is only 200ms,
Microsoft's model has already surpassed human performance,
achieving 98% grammatical correctness and 96% factual correctness.
The implications are profound; today, the relative scarcity and
cost of collecting data required to train machines is preventing
wider adoption of real-time analytics. However, transformer-based
models have the potential to transform myriad industries (and
redistribute their profit pools).
Significant progress has also been made using AI to solve
complex games building on DeepMind's AlphaGo victory over Lee Sodol
in 2016. In the field of poker, Plurius an AI engine designed by
Carnegie Mellon and Facebook beat 12 professional players over more
than 10,000 hands. By playing millions of hands of poker against
copies of itself, Plurius was able to use a limit look-ahead
algorithm, rather than playing to the end through decision trees.
This allowed it to 'solve' for poker in just eight days using a
single 64-core server and just 28 cores during live play -
remarkable when one considers that DeepMind's AlphaGo victory used
1920 CPUs and 280 GPUs. In October, Googleowned DeepMind's
StarCraft 2 AI reached grandmaster status in the real-time strategy
game, besting 99.8% of humans. It was trained by watching videos of
professionals, then from simulated game play against itself over 44
days, equivalent to 200 human years playing the game.
More recently, NVIDIA has used a generative adversarial network
(GAN) to recreate PAC-MAN without an underlying game engine. Rather
than relying on actual gameplay, two competing neural networks
instead created 50,000 episodes of content "convincing enough to
pass for the original" allowing the AI to learn the rules of the
game.
However, there is still much work to do. In the case of PAC-MAN,
the neutral networks were so good at playing the game that they
trained themselves incorrectly with ghosts closely trailing, rather
than making contact with the titular protagonist. More worryingly,
GANs have been exploited to create 'deepfakes' seen on social media
where faces have been transposed or voices transformed to give the
impression that someone did or said something they did not. Last
year, Nancy Pelosi was the target of a deepfake with her speech
appearing slow and slurred in a video shown on Facebook leading
Rudy Guiliani to question her mental state. This issue is so
serious that several US states have passed laws banning the use of
deepfakes to interfere with elections. Likewise, persistent privacy
concerns have led to lawmakers in San Francisco outlawing the use
of facial recognition technologies. The industry will also have to
address the lack of traceability (i.e. which factors have played
key roles) making it difficult to justify outcomes and apply
specific AI algorithms to different datasets. Despite these
challenges, we are comforted by the fact that controversy often
accompanies rapid diffusion of new technologies and that in time,
appropriate governance will be established to facilitate the rapid
and healthy development of AI, one of most powerful technologies in
decades.
The current crisis has shown the modern world is built on
technology. Trends we have witnessed and written about for many
years have accelerated during the crisis, and many will remain at
structurally higher levels once the crisis recedes. The
self-induced nature of the downturn together with unprecedented
fiscal stimulus that in the UK has seen 8.4m jobs furloughed has
frustrated the 2008/9 'playbook' and leaves us hopeful that
recovery may positively surprise us too. Our process and
experienced team of nine dedicated investment professionals
(including two new additions during the past year) remain
well-positioned to assess and invest in this ongoing structural
change, and we look forward to many more years of growth for the
technology sector.
Ben Rogoff & Team
13 July 2020
ESG ISSUES
Environmental, social and governance issues have become more
prominent in the technology sector in recent years. Technology has
reshaped society and the economy, and the speed and scale of that
change has brought great friction. Overall, we feel that while the
sector may have contributed to many environmental, social and
governance problems, it also has the singular capacity to alleviate
many of them. Banks are unlikely to improve financial inclusion.
Hospitals themselves are not going to build scalable telehealth
products. Oil and gas companies are not going to solve climate
change. This is not to diminish any of their efforts, but simply to
point out that the technology sector is best positioned to provide
the innovation at scale required to meet such existential
challenges.
Taking climate change as a pressing example, The International
Energy Agency's 2040 'Sustainable Development Scenario' suggests
that 80% of the reduction in cumulative CO2 emissions will come
from greater energy efficiency (44%) and greater use of renewables
(36%).The performance of renewables and energy efficiency
improvements are driven by technological advances at the
semiconductor and software levels. This can range from Silicon
Carbide chips to improve the efficiency of the power electronics in
electric vehicles to powerful computer-aided design (CAD) software
to make better products with less material. When aluminum beverage
cans were introduced 60 years ago they weighed about 60 grams;
today they weigh about 13 grams. The Met Office will create an
enormous 'digital twin' of the atmosphere and be able to forecast
climate change with far greater accuracy and granularity.
E: THE ENVIRONMENTAL IMPACT OF THE TECHNOLOGY SECTOR
In spite of a trillion-fold improvement in the energy efficiency
of computation since 1946, datacentres and data transmission
networks already consume 2% of the world's energy or 360TWh per
year - about the same as the global aviation industry. Perhaps
surprisingly, the absolute energy draw of datacentres has remained
flat over the past 5 years even as workloads have tripled and
traffic has quintupled.
T his is because computation has shifted from traditional
corporate datacentres to more energy-efficient 'hyperscale' cloud
datacentres run by Amazon, Microsoft and Google. Hyperscale cloud
operators can run dramatically more efficiently than on-premise due
to higher server utilisation and more energy-efficient
infrastructure. A case study from Berkeley suggested that moving
common software applications to the cloud could reduce energy usage
by 87%.
DEMATERIALISATION
As human society industrialised, the economy's demand for
natural resources of all kinds rose in lockstep with economic
growth. This voracious growth may have liberated most of mankind
from a subsistence-style existence, but it came at a huge
environmental cost; technology and capitalism provided tools that
destroyed the planet.
But this is not the whole story. The nature of economic growth
has changed. Until about 1970 resource use and real GDP moved in
lockstep as the economy grew. A larger economy consumed more
resources. The first Earth Day festival in 1970 marked the peak of
this trend as fears of overpopulation and a new Malthusian crisis
appeared imminent to some. How could the planet provide enough
resources to support this growth? It was, in hindsight, at this
point the US economy began to change in nature. The economy
continued to grow, but the amount of physical materials it consumed
to support that growth began to decline.
A detailed study of 100 commodities in the US from 1900 to 2000
showed that "36 have peaked in absolute use... another 53 have
peaked relative to the size of the economy". The chart included in
the Annual Report, shows how the usage of a wide range of materials
and energy grew with real GDP through until 1970 (all data indexed
to 1970 = 1.0). Then, the correlation broke down quite abruptly
during the 1970s, as the economy continued to grow, but the
resources used to support that growth did not. A similar phenomenon
has been documented in the UK.
This phenomenon was itself driven by a process of
dematerialisation, whereby technology made physical things digital
(movies, music, correspondence etc), and better design software and
more advanced materials meant physical goods could be made with
less physical 'stuff'. The smartphone is perhaps the ultimate
example of this process of dematerialisation: a telephone, camera,
computer, camcorder, Filofax, newspaper, Walkman, calculator,
answering machine, clock, photo album, CD collection, stopwatch,
notebook - all in one small package. The iPhone uses vastly less
metal, plastic, glass and silicon than the products and processes
it has replaced.
S: THE SOCIAL IMPACT OF THE TECHNOLOGY SECTOR
The 'social impact of technology on the world' is too broad to
cover fully in this report. As with technology's environmental
impact, we see a complex picture of harmful and supportive forces.
Electronic learning and 'fake news' are two strands in the same
thread: the democratization of both the production and consumption
of information. We have online bullying and online support groups.
There are YouTube videos to show how to fix a car and how to make a
bomb. Technology companies have rightly come under immense pressure
to demonstrate they are working to keep their platforms as clear as
possible of factually untrue or potentially harmful information and
we have engaged with company representatives to understand how they
are doing this. One trend is becoming clearer: the apparatus of
government and evolution of social attitudes have struggled - or
even failed - to keep pace with technological change. 61% of
respondents in a recent survey agreed with the statement that
'Government does not understand emerging technologies enough to
regulate them effectively', and fully 74% agreed that 'CEOs should
take the lead on change rather than waiting for government to
impose it'.
We consider 'Social' factors in our investment decision-making
process insofar as they are likely to impact a company's long-term
prospects. This can include considering the tradeoffs required for
a new technology to move up (or fail to move up) an adoption curve
as soon we expect. For example, the growth and profitability of
online advertising relies on users giving up some privacy if ads
served to them are to become more effective over time. It is
sometimes overlooked that both behaviour and survey data suggests
that the 'silent majority' of internet users are fairly relaxed
about this tradeoff, and that trust in the technology sector
remains the highest of any sector.
G: GOVERNANCE ISSUES IN THE TECHNOLOGY SECTOR
We have always considered governance as part of our investment
approach and have voted against board resolutions on many
occasions, especially in Asia where governance tends to be weakest.
We provide both formal and informal advice where we feel it is
appropriate and on occasion have written formally to the boards of
our holdings. We are actively engaged around executive pay and the
use of stock option awards is something we discuss in many of our
company meetings. This is an area we are very focused on given the
financial - as well as moral - impact associated with stock
issuance as some company management teams enrich themselves
excessively at the expense of investors via excessive equity
dilution.
OUR ESG APPROACH
We have recently introduced a new ESG analysis/scoring framework
across Polar Capital which ranks each of our holdings (AAA to CCC)
on each factor relative to similar technology companies enabling us
to better challenge the underperformers and/or make more informed
decisions. This report is included and treated as part of our
monthly risk reporting process, and changes in a company's ESG
rating will be investigated by the analyst responsible for it.
Whilst our investment process is not driven by ESG our aim is to
improve the behaviour of our companies and avoid the worst
offenders (any highlighted CCC in ESG scoring must be challenged on
the areas of most concern). Longer term we believe this also
benefits performance because companies which disregard ESG factors
are often not good investments as either public opinion or
regulation eventually catches up with them.
At a firm level we exclude all companies that are linked to the
production and/or marketing of controversial weapons (cluster
munitions, antipersonnel mines, depleted uranium etc.). We also
exclude EU and UN Sanctioned entities and entities on the US OFAC
list.
Alastair Unwin
13 July 2020
PORTFOLIO REVIEW
As at
As at 30 April
Breakdown of Investments by Region 30 April 2020 2019
------------------------------------- --------------- ----------
US & Canada 71.1% 68.7%
Asia Pacific (ex-Japan) 13.5% 12.5%
Japan 6.2% 5.5%
Europe (inc-UK) 4.8% 6.3%
Other Net Assets 3.9% 6.8%
Middle East & Africa 0.5% 0.2%
Market Capitalisation of Underlying Investments As at
As at 30 April
30 April 2020 2019
-------------------------------------------------- --------------- ----------
>$10bn 81.5% 77.6%
$1bn-$10bn 17.6% 21.2%
<GBP1bn 0.9% 1.2%
All data sourced from Polar Capital LLP.
CLASSIFICATION OF INVESTMENTS*
as at 30 April 2020
Total Total
30 April 30 April
Benchmark
Asia Pacific Weightings
(inc. Middle as at 30
North Europe East) 2020 2019 April
America
% % % % % 2020
------------------------------------- -------- ------ ------------- --------- --------- -----------
Software 24.2 0.4 0.3 24.9 27.7 28.4
-------- ------ ------------- --------- --------- -----------
Semiconductors & Semiconductor
Equipment Equipment 10.5 2.3 5.1 17.9 15.9 18.8
-------- ------ ------------- --------- --------- -----------
Interactive Media & Services 12.8 0.2 3.2 16.2 16.9 18.7
-------- ------ ------------- --------- --------- -----------
Technology Hardware, Storage
& Peripherals 7.3 0.1 2.7 10.1 7.9 17.8
-------- ------ ------------- --------- --------- -----------
Internet & Direct Marketing
Retail 3.8 1.0 4.1 8.9 6.9 4.1
-------- ------ ------------- --------- --------- -----------
Electronic Equipment, Instruments
& Components 2.1 - 2.8 4.9 3.8 0.6
-------- ------ ------------- --------- --------- -----------
IT Services 4.5 - 0.1 4.6 5.6 6.5
-------- ------ ------------- --------- --------- -----------
Entertainment 2.4 0.6 0.6 3.6 2.3 0.6
-------- ------ ------------- --------- --------- -----------
Communications Equipment 1.9 - - 1.9 1.5 3.4
-------- ------ ------------- --------- --------- -----------
Machinery 0.1 - 1.3 1.4 1.0 -
-------- ------ ------------- --------- --------- -----------
Aerospace & Defense 0.6 - - 0.6 0.7 -
-------- ------ ------------- --------- --------- -----------
Healthcare Equipment & Supplies 0.3 - - 0.3 0.9 -
-------- ------ ------------- --------- --------- -----------
Leisure Products 0.3 - - 0.3 - -
-------- ------ ------------- --------- --------- -----------
Diversified Telecommunication
Services 0.3 - - 0.3 - 0.3
-------- ------ ------------- --------- --------- -----------
Electrical Equipment - 0.2 - 0.2 - -
-------- ------ ------------- --------- --------- -----------
Healthcare Technology - - - - 0.8 0.6
-------- ------ ------------- --------- --------- -----------
Diversified Consumer Services - - - - 0.5 -
-------- ------ ------------- --------- --------- -----------
Life Sciences Tools & Services - - - - 0.4 -
-------- ------ ------------- --------- --------- -----------
Auto Components - - - - 0.2 -
-------- ------ ------------- --------- --------- -----------
Road & Rail - - - - 0.2 -
-------- ------ ------------- --------- --------- -----------
Total investments (GBP2,218,307,000) 71.1 4.8 20.2 96.1 93.2
-------- ------ ------------- --------- --------- -----------
Other net assets (excluding
loans) 3.4 1.1 1.9 6.4 9.6
-------- ------ ------------- --------- --------- -----------
Loans (0.8) - (1.7) (2.5) (2.8)
------------------------------------- -------- ------ ------------- --------- --------- -----------
Grand total (net assets of
GBP2,308,597,000) 73.7 5.9 20.4 100.0 -
-------- ------ ------------- --------- --------- -----------
At 30 April 2019 (net assets
of GBP1,935,646,000) 74.7 6.4 18.9 - 100.0
-------- ------ ------------- --------- --------- -----------
*The classifications are derived from the Benchmark as far as
possible. The categorisation of each investment is shown in the
portfolio available on the Company's website. Where a dash is shown
for the Benchmark it means that the sector is not represented in
the Benchmark. Not all sectors of the Benchmark are shown, only
those in which the Company has an investment at the financial year
end.
BENCHMARK
The Company uses the Dow Jones World Technology Index (total
return, in Sterling with the removal of relevant withholding
taxes), ('the Benchmark ') as the benchmark against which net asset
value performance is measured for the purpose of assessing
performance fees.
As at 30 April 2020 the Dow Jones World Technology Index was
calculated as a market capitalisation based index of 691 technology
companies worldwide. 73.7% of the index weighting is in North
America, 6.3% in Europe and 16.9% in Asia Pacific (ex-Japan). By
market capitalisation 90.9% is represented by large companies, 8.5%
by mid-caps and 0.6% by smaller companies.
Shareholders should be aware that the Company's portfolio is
actively managed and is not designed to closely track any
particular benchmark, index or market. Given the dynamic nature of
technology markets and the rapid changes in share prices of
technology shares favoured by the Investment Manager, the
performance of the portfolio can vary from the Benchmark
performance, at times considerably.
Although the Company has a benchmark, this is neither a target
nor an ideal investment strategy. The purpose of the Benchmark is
to set a reasonable return for Shareholders above which the
Investment Manager is entitled to a share of the extra performance
the Investment Manager has delivered.
FULL PORTFOLIO as at 30 April 2020
% of net
Value of holding assets
30 30 30 30
April April April April
Ranking 2020 2019 2020 2019
--------------------- ----------------------- -------------- ---------- --------- ------- -------
2020 2019 Stock Sector Region GBP'000 GBP'000 % %
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
1 (1) Microsoft Software North America 236,529 170,736 10.2 8.8
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Interactive
2 (2) Alphabet Media & Services North America 181,039 149,210 7.8 7.7
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Technology Hardware,
3 (4) Apple Storage & Peripherals North America 168,615 85,862 7.3 4.4
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Interactive
4 (3) Facebook Media & Services North America 95,587 91,458 4.1 4.7
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Internet & Direct
5 (5) Alibaba Marketing Retail Asia Pacific 87,073 64,772 3.8 3.3
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Interactive
6 (6) Tencent Media & Services Asia Pacific 74,327 55,788 3.2 2.9
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Internet & Direct
7 (7) Amazon.com Marketing Retail North America 71,522 54,350 3.1 2.8
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Samsung Technology Hardware,
8 (8) Electronics Storage & Peripherals Asia Pacific 62,654 52,421 2.7 2.7
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Semiconductors
Advanced & Semiconductor
9 (13) Micro Devices Equipment North America 50,291 28,936 2.2 1.5
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Semiconductors
& Semiconductor
10 (30) Nvidia Equipment North America 49,804 15,165 2.2 0.8
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Top 10 investments 1,077,441 46.6
----------------------- -------------- ---------- --------- ------- -------
Semiconductors
& Semiconductor
11 (9) Taiwan Semiconductor Equipment Asia Pacific 43,321 42,654 1.9 2.2
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
12 (12) Salesforce.com Software North America 42,538 29,987 1.8 1.6
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Semiconductors
& Semiconductor
13 (50) Intel Equipment North America 40,165 9,920 1.7 0.5
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Semiconductors
& Semiconductor
14 (17) ASML Equipment Europe 34,081 22,787 1.5 1.2
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
15 (10) ServiceNow Software North America 32,541 37,452 1.4 2.0
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
16 (14) PayPal IT Services North America 31,514 28,133 1.4 1.5
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
17 (11) Adobe Software North America 30,095 37,303 1.3 1.9
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Semiconductors
& Semiconductor
18 (19) Toyko Electron Equipment Asia Pacific 24,102 20,269 1.0 1.0
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Semiconductors
& Semiconductor
19 (-) MediaTek Equipment Asia Pacific 22,416 - 1.0 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Electronic Equipment,
Instruments
20 (73) Cognex & Components North America 21,884 6,828 1.0 0.4
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Top 20 investments 1,400,098 60.6
----------------------- -------------- ---------- --------- ------- -------
Semiconductors
& Semiconductor
21 (16) Texas Instruments Equipment North America 21,360 23,814 1.0 1.2
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Activision
22 (-) Blizzard Entertainment North America 21,302 - 0.9 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
23 (25) Visa IT Services North America 21,042 16,460 0.9 0.9
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
24 (89) Netflix Entertainment North America 20,307 4,830 0.9 0.2
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Semiconductors
& Semiconductor
25 (28) Qualcomm Equipment North America 19,374 15,645 0.8 0.8
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
26 (65) Splunk Software North America 19,124 7,434 0.8 0.4
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Communications
27 (58) Lumentum Equipment North America 19,108 8,755 0.8 0.4
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
28 (21) Mastercard IT Services North America 18,893 18,298 0.8 0.9
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
29 (15) Zendesk Software North America 18,759 26,100 0.8 1.3
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
30 (-) CrowdStrike Software North America 17,895 - 0.8 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Top 30 investments 1,597,262 69.1
----------------------- -------------- ---------- --------- ------- -------
31 (52) RingCentral Software North America 17,077 9,636 0.7 0.5
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Electronic Equipment,
Instruments
32 (-) Taiyo Yuden & Components Asia Pacific 16,809 - 0.7 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
33 (-) Cloudflare Software North America 16,807 - 0.7 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Semiconductors
& Semiconductor
34 (36) Advantest Equipment Asia Pacific 16,273 12,845 0.7 0.7
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
35 (46) HubSpot Software North America 16,058 10,358 0.7 0.5
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
36 (54) Everbridge Software North America 15,333 9,369 0.7 0.5
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Internet & Direct
37 (-) Grubhub Marketing Retail North America 15,149 - 0.7 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Communications
38 (-) Ciena Equipment North America 14,879 - 0.7 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Semiconductors
& Semiconductor
39 (22) Xilinx Equipment North America 14,576 17,572 0.6 0.9
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Take-Two
Interactive
40 (82) Software Entertainment North America 14,117 5,813 0.6 0.3
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Top 40 investments 1,754,340 75.9
----------------------- -------------- ---------- --------- ------- -------
Aerospace &
41 (31) Axon Enterprise Defense North America 13,883 14,774 0.6 0.7
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Semiconductors
Lattice & Semiconductor
42 (-) Semiconductor Equipment North America 13,638 - 0.6 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Spotify
43 (40) Technology Entertainment Europe 13,506 12,633 0.6 0.7
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
44 (-) Nintendo Entertainment Asia Pacific 12,856 - 0.6 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Electronic Equipment,
Instruments
45 (-) FLIR Systems & Components North America 12,743 - 0.6 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
46 (27) Synopsys Software North America 12,574 16,009 0.5 0.8
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Internet & Direct
47 (84) Ocado Marketing Retail Europe 11,966 5,495 0.5 0.3
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
48 (77) Okta IT Services North America 11,889 6,268 0.5 0.3
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
49 (42) Proofpoint Software North America 11,717 11,313 0.5 0.6
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Electronic Equipment,
Instruments
50 (78) TDK & Components Asia Pacific 11,414 6,014 0.5 0.3
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Top 50 investments 1,880,526 81.4
----------------------- -------------- ---------- --------- ------- -------
Semiconductors
& Semiconductor
51 (-) Siltronic Equipment Europe 11,133 - 0.5 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
52 (-) Fanuc Machinery Asia Pacific 11,074 - 0.5 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Electronic Equipment,
Keysight Instruments
53 (-) Technologies & Components North America 11,013 - 0.5 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Semiconductors
& Semiconductor
54 (-) Power Integrations Equipment North America 10,985 - 0.5 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Interactive
55 (-) Twitter Media & Services North America 10,770 - 0.5 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
56 (64) Alteryx Software North America 10,761 7,562 0.5 0.4
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Harmonic
57 (61) Drive Systems Machinery Asia Pacific 10,579 8,297 0.4 0.4
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Fuji Machine
58 (57) Manufacturing Machinery Asia Pacific 10,314 8,835 0.4 0.5
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Interactive
59 (41) Pinterest Media & Services North America 9,908 12,390 0.4 0.6
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Electronic Equipment,
Instruments
60 (66) Keyence & Components Asia Pacific 9,291 7,425 0.4 0.4
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Top 60 investments 1,986,354 86.0
----------------------- -------------- ---------- --------- ------- -------
Electronic Equipment,
Instruments
61 (-) Hirose Electric & Components Asia Pacific 9,276 - 0.4 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Semiconductors
SolarEdge & Semiconductor
62 (-) Technologies Equipment Asia Pacific 9,252 - 0.4 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
63 (91) Anaplan Software North America 8,738 4,703 0.4 0.2
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
64 (-) SAP Software Europe 8,672 - 0.4 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
65 (35) Ansys Software North America 8,621 12,928 0.4 0.7
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
66 (37) Twilio IT Services North America 8,488 12,814 0.4 0.7
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
67 (-) Medallia Software North America 8,411 - 0.4 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Healthcare Equipment
68 (-) Dexcom & Supplies North America 7,812 - 0.3 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Semiconductors
& Semiconductor
69 (43) Aixtron Equipment Europe 7,747 11,200 0.3 0.6
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Internet & Direct
70 (-) Meituan-Dianping Marketing Retail Asia Pacific 7,540 - 0.3 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Top 70 investments 2,070,911 89.7
----------------------- -------------- ---------- --------- ------- -------
Cadence
71 (-) Design Systems Software North America 7,476 - 0.3 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
72 (-) Akamai Technologies IT Services North America 7,463 - 0.3 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Semiconductors
Applied & Semiconductor
73 (-) Materials Equipment North America 7,458 - 0.3 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Electronic Equipment,
Samsung Instruments
74 (-) Electro-Mechanics & Components Asia Pacific 6,949 - 0.3 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
75 (-) Smartsheet Software North America 6,727 - 0.3 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Semiconductors
& Semiconductor
76 (-) Veeco Instruments Equipment North America 6,565 - 0.3 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Communications
77 (20) Arista Networks Equipment North America 6,549 19,368 0.3 1.0
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Electronic Equipment,
Instruments
78 (71) Shimadzu & Components Asia Pacific 6,492 7,103 0.3 0.4
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Diversified
Telecommunication
79 (-) Bandwith Services North America 6,438 - 0.3 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Internet & Direct
80 (-) Zalando Marketing Retail Europe 6,410 - 0.3 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Top 80 investments 2,139,438 92.7
----------------------- -------------- ---------- --------- ------- -------
81 (-) Dynatrace Software North America 6,397 - 0.3 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Peloton
82 (-) Interactive Leisure Products North America 6,351 - 0.3 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
83 (-) Ping Identity Software North America 6,084 - 0.3 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Internet & Direct
84 (-) Just Eat Marketing Retail Europe 5,941 - 0.2 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
85 (45) 8X8 Software North America 5,886 10,806 0.2 0.6
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Semiconductors
& Semiconductor
86 (18) Analog Devices Equipment North America 5,380 20,943 0.2 1.1
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Electronic Equipment,
Yaskawa Instruments
87 (59) Electric & Components Asia Pacific 4,845 8,725 0.2 0.4
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
88 (-) Atlassian Software Asia Pacific 4,611 - 0.2 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
89 (69) Square IT Services North America 4,512 7,280 0.2 0.4
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Interactive
90 (-) Auto Trader Media & Services Europe 4,414 - 0.2 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Top 90 investments 2,193,859 95.0
----------------------- -------------- ---------- --------- ------- -------
91 (-) BlackLine Software North America 4,120 - 0.2 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
92 (-) NEL ASA Electrical Equipment Europe 3,992 - 0.2 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Semiconductors
Ememory & Semiconductor
93 (94) Technology Equipment Asia Pacific 3,022 3,842 0.1 0.2
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
94 (-) Protolabs Machinery North America 2,975 - 0.1 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
95 (105) Zuken IT Services Asia Pacific 2,746 1,649 0.1 0.1
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Technology Hardware,
96 (104) Tobii Storage & Peripherals Europe 1,899 1,858 0.1 0.1
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
97 (98) Mix Telematics Software Asia Pacific 1,846 2,990 0.1 0.2
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Communications
98 (103) KVH Industries Equipment North America 1,332 1,897 0.1 0.1
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Semiconductors
& Semiconductor
99 (-) Impinj Equipment North America 1,320 - 0.1 -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Electronic Equipment,
Instruments
100 (107) Seeing Machines & Components Asia Pacific 1,144 1,540 - 0.1
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Top 100 investments 2,218,255 96.1
----------------------- -------------- ---------- --------- ------- -------
Herald Ventures
Limited
101 (111) Partnership Other Europe 52 55 - -
------ --------------------- ----------------------- -------------- ---------- --------- ------- -------
Total equities 2,218,307 96.1
--------------------- --------------------------------------------------- ------------------
Other net
assets 90,290 3.9
--------------------- --------------------------------------------------- ------------------
Total net
assets 2,308,597 100.0
--------------------- --------------------------------------------------- ------------------ -------
Note: Asia Pacific includes Middle East.
STRATEGIC REPORT
The Strategic Report section of this Annual Report comprises the
Chair's Statement, the Investment Manager's Report, including
information on the portfolio, and this Strategic Report. It has
been prepared to provide information to Shareholders on the
Company's strategy and the potential for such to succeed, including
a fair review of the Company's performance during the year ended 30
April 2020, the position of the Company at the year end and a
description of the principal risks and uncertainties. The Strategic
Report section contains certain forward looking statements, made by
the Directors in good faith based on the information available to
them at the time of their approval of this Report. Such statements
should be treated with caution due to inherent uncertainties,
including both economic and business risk factors underlying any
such forward-looking information.
INTRODUCTION AND BUSINESS MODEL
The Company's business model follows that of an externally
managed investment trust providing Shareholders with access to an
actively managed portfolio of technology shares selected on a
worldwide basis.
The Company is designated an Alternative Investment Fund ('AIF')
under the Alternative Investment Fund Management Directive
('AIFMD') and as required by the Directive has contracted with
Polar Capital LLP to act as the Alternative Investment Fund Manager
('AIFM') and Investment Manager (or 'Manager') and HSBC Bank Plc to
act as the Depositary.
Further information on the operation of the business is set out
in the Directors' Report contained within the Company's 2020 Annual
Report .
Polar Capital LLP also provides company secretarial services and
assists with providing general administration including liaison
with directly appointed third party suppliers.
INVESTMENT OBJECTIVE AND POLICY
While observing the Dow Jones World Technology Index (total
return, Sterling adjusted, with the removal of relevant withholding
taxes) as the Benchmark against which NAV performance is measured,
Shareholders should be aware that the portfolio is actively managed
and is not designed to track any particular benchmark index or
market. The performance of the portfolio can vary from the
Benchmark performance, at times considerably.
Over the last four decades the technology industry has been one
of the most vibrant, dynamic and rapidly growing segments of the
global economy. Technology companies offer the potential for
substantially faster earnings growth than the broader market.
Investments are selected for their potential Shareholder
returns, not on the basis of technology for its own sake. The
Investment Manager believes in rigorous fundamental analysis and
focuses on:
-- management quality;
-- the identification of new growth markets;
-- the globalisation of major technology trends; and
-- exploiting international valuation anomalies and sector
volatility.
Objective
The Company's Investment Objective has been since formation, and
will continue to be, to maximise long-term capital growth by
investing in a diversified portfolio of technology companies around
the world.
Policy
At the Annual General Meeting in 2012 the Investment Policy, as
detailed below and available on the
Company's website, was approved. The Portfolio has been managed
in accordance with the Policy in the year to 30 April 2020.
Asset Allocation
Technology may be defined as the application of scientific
knowledge for practical purposes and technology companies are
defined accordingly. While this offers a very broad and dynamic
investing universe and covers many different companies, the
portfolio of the Company (the 'Portfolio') is focused on companies
which use technology or which develop and supply technological
solutions as a core part of their business models. This includes
areas as diverse as information, media, communications,
environmental, healthcare, finance, e-commerce and renewable
energy, as well as the more obvious applications such as computing
and associated industries.
The Board has agreed a set of parameters which seek to ensure
that investment risk is spread and diversified. The Board believes
that this provides the necessary flexibility for the Investment
Manager to pursue the Investment Objective, given the dynamic and
rapid changes in the field of technology, while maintaining a
spread of investments.
Risk Diversification
The Company will at all times invest and manage its assets in a
manner that is consistent with spreading investment risk and
invests in a Portfolio comprised primarily of international quoted
equities which is diversified across both regions and sectors.
In applying the Policy, the Company will satisfy the following
investment restrictions:
-- The Company's interest in any one company will not exceed 10%
of the gross assets of the Company, save where the Benchmark
weighting of any investee company in the Company's portfolio
exceeds this level, in which case the Company will be permitted to
increase its exposure to such investee company up to the Benchmark
'neutral' weighting of that company or, if lower, 15% of the
Company's gross assets.
-- The Company will have a maximum exposure to companies listed
in emerging markets (as defined
by the MSCI Emerging Markets Index) of 25% of its gross
assets.
-- The Company may invest in unquoted companies from time to
time, subject to prior Board approval. Investments in unquoted
companies in aggregate will not exceed 10% of the gross assets of
the Company (measured at the time of acquisition of the relevant
investment and whenever the Company increases the relevant
holding).
In addition to the restrictions set out above, the Company is
subject to Chapter 15 of the FCA's Listing Rules which apply to
closed ended investment companies with a premium listing on the
Official List of the London Stock Exchange. In order to comply with
the current Listing Rules, the Company will not invest more than
10% of its total assets at the time of acquisition in other listed
closed ended investment funds, whether managed by the Investment
Manager or not. This restriction does not apply to investments in
closed ended investment funds which themselves have published
investment policies to invest no more than 15% of their total
assets in other listed closed ended investment funds.
Borrowing, Cash and Derivatives
The Company may borrow money to invest in the Portfolio over
both the long and short-term. Any commitment to borrow funds is
agreed by the Board and the AIFM.
The Company's Articles of Association permit borrowings up to
the amount of its paid up share capital plus capital and revenue
reserves but any net borrowings in excess of 20% of the Company's
net assets at the time of drawdown will only be made with the
approval of the Board.
The Investment Manager may also use from time to time derivative
instruments, as approved by the Board, such as financial futures,
options, contracts-for-difference and currency hedges. These are
used for the purpose of efficient portfolio management. Any such
use of derivatives will be made in accordance with the Company's
policies on spreading investment risk as set out in this investment
policy and any leverage resulting from the use of such derivatives
will be subject to the restrictions on borrowings.
Changes to Investment Policy
Any material change to the Investment Policy will require the
approval of the Shareholders by way of an ordinary resolution at a
general meeting. The Company will promptly issue an announcement to
inform Shareholders and the public of any change of its Investment
Policy.
INVESTMENT STRATEGY GUIDELINES AND BOARD LIMITS
The Board has established guidelines for the Investment Manager
in pursuing the Investment Policy. The Board uses these guidelines
to monitor the portfolio's exposure to different geographical
markets, sub-sectors within technology and the spread of
investments across different market capitalisations.
These guidelines are kept under review as cyclical changes in
markets and new technologies will bring certain sub-sectors or
companies of a particular size or market capitalisation into or out
of favour.
Market parameters
With current and foreseeable investment conditions, the
Portfolio will be invested in accordance with the Investment
Objective and Policy across worldwide markets, generally within the
following ranges:
-- North America up to 85% of the Portfolio
-- Europe up to 40% of the Portfolio
-- Japan and Asia up to 55% of the Portfolio
-- Rest of the world up to 10% of the Portfolio
The Board has set specific upper exposure limits for certain
countries where they believe there may be an elevated risk.
Cash
The Company may hold cash or near cash equivalents if the
Investment Manager feels that these will at a particular time or
over a period enhance the performance of the Portfolio. The Board
has agreed that management of cash may be achieved through the
purchase of appropriate government bonds, money market funds or
bank deposits depending on the Investment Manager's view of the
investment opportunities.
Gearing
The Board monitors the level of gearing available to the
Portfolio Manager and agrees, in conjunction with the AIFM, all
bank facilities in accordance with the Investment Policy.
During the year the Company had two, two-year loan facilities
with ING Bank NV: One for 23.3m US Dollars at a fixed rate of
4.235% pa and one for 5.2bn Japanese Yen at a fixed rate of 0.8%
pa, both of which were drawn down on 2 October 2018. These loans
fall due for repayment on 2 October 2020. It is anticipated that
the loan facilities will be replaced on expiry. These loans
replaced the previously held three year loans of which expired on 2
October 2018 and the revolving credit facility which expired on 2
October 2019. Details of the loans are set out in Note 17 to the
Financial Statements.
FUTURE DEVELOPMENTS
The Board remains positive on the longer-term outlook for
technology and the Company will continue to pursue its Investment
Objective. The outlook for future performance is dependent to a
significant degree on the world's financial markets and their
reactions to economic events and other geopolitical forces. In
accordance with the Articles of Association, the Board will be
proposing the five-yearly continuation vote of the Company at the
Annual General Meeting to be held in September 2020; the Board are
supportive of the Company continuing in it's current form and will
be recommending the resolution to Shareholders. The Chair's
Statement and the Investment Manager's Report comment on the
outlook.
DIVIDS
The Company's revenue varies from year to year and the Board
considers the dividend position each year in order to maintain the
Company's status as an investment trust. The revenue reserve
remains in deficit and historically the Company has not paid
dividends given its focus on capital growth.
The Directors do not recommend, for the year under review, the
payment of a dividend.
SERVICE PROVIDERS
Polar Capital LLP has been appointed to act as the Investment
Manager and AIFM as well as to provide or procure company
secretarial services and administrative services, including
accounting, portfolio valuation and trade settlement which it has
arranged to deliver through HSBC Securities Services ('HSS'). HSS
have also been appointed as the Company's Custodian and
Depository.
The Company also contracts directly with a number of third
parties for the provision of regularly required services:
-- Stifel Nicolaus Europe Limited as Corporate Broker;
-- Equiniti Limited as Registrar;
-- KPMG LLP as independent Auditors;
-- Camarco as PR advisors; and
-- Emperor as website designers, internet hosting services and
designers and printers for Shareholder communications.
REGULATORY ARRANGEMENTS
Both the AIFM and the Depositary have responsibilities under
AIFMD for ensuring that the assets of the Company are managed in
accordance with the Investment Policy and are held in safe custody.
The Board remains responsible for setting the investment strategy
and operational guidelines as well as meeting the requirements of
the FCA's Listing Rules and the Companies Act 2006.
The AIFMD requires certain information to be made available to
investors in AIFs before they invest and requires that material
changes to this information be disclosed in the Annual Report of
each AIF. Investor Disclosure Documents, which set out information
on the Company's investment strategy and policies, leverage, risk,
liquidity, administration, management, fees, conflicts of interest
and other Shareholder information are available on the Company's
website.
There have been no material changes to the information requiring
disclosure. Any information requiring immediate disclosure pursuant
to the AIFMD will be disclosed to the London Stock Exchange through
a primary information provider. Statements from the Depositary and
the AIFM can be found on the Company's website.
The Company seeks to manage its portfolio in such a way as to
meet the tests in Section 1158 and 1159 of the Corporation Tax Act
2010 (as amended by Section 49(2) of the Finance Act 2011) and
continue to qualify as an investment trust. This qualification
permits the accumulation of capital within the portfolio without
any liability to UK Capital Gains Tax. Further information is
provided in the Directors' Report.
KEY PERFORMANCE INDICATORS
The Board appraises the performance of the Company and the
Investment Manager as the key supplier of services to the Company
against Key Performance Indicators ('KPIs'). The objectives of the
KPIs comprise both specific financial and Shareholder related
measures, these KPIs have not differed from the prior year.
KPI Control process Outcome
The provision of investment The Board reviews the At 30 April 2020 the
returns to Shareholders performance of the total net assets of
measured by long-term portfolio in detail the Company amounted
NAV growth and relative and hears the views to GBP2,308,597,000
performance against of the Investment Manager (2019: GBP1,935,646,000).
the Benchmark. at each meeting. The Company's NAV has,
over the year to 30
April 2020, outperformed
the Benchmark. The
NAV per share rose
by 18.6% from 1446.40p
to 1715.59p while the
Benchmark rose 18.1%
in Sterling terms over
the same period. As
at 30 April 2020 the
portfolio comprised
101 (2019: 111) investments.
Investment performance
is explained in the
Chair's Statement and
the Investment Manager's
Report.
Over the longer-term,
as shown by the historic
performance data shown
above, growth in the
NAV has exceeded the
Benchmark.
------------------------------- ------------------------------
Monitoring and reacting The Board receives The discount/premium
to issues created by regular information of the ordinary share
the discount or premium on the composition price to NAV per ordinary
of the ordinary share of the share register share (diluted when
price to the NAV per including trading patterns appropriate) has been
ordinary share with and discount/premium as follows:
the aim of reduced levels of the Company's
discount volatility ordinary shares. Financial year to 30
for Shareholders. April 2020
The Board is aware -- Maximum premium
of the vulnerability over year: 5.3%
of a sector specialist -- Maximum discount
investment trust to over year: 15.9%
a change in investor -- Average discount
sentiment to that sector. over year: 4.4%
While there is no formal
discount policy the The Company has not
Board discusses the bought back any shares
market factors giving in the year to 30 April
rise to any discount 2020 and has issued
or premium, the long 741,000 shares when
or short-term nature the issue was NAV enhancing
of those factors and to existing
the overall benefit Shareholders.
to Shareholders of
any actions. The market Over the previous five
liquidity is also considered financial years ended
when authorising the 30 April 2020
issue or buy back of -- Maximum premium
shares when appropriate over period: 5.3%
market conditions prevail. -- Maximum discount
over period: 15.9%
A daily NAV per share, -- Average discount
diluted when appropriate, over period: 2.9%
calculated in accordance
with the AIC guidelines, Over the previous five
is issued to the London financial years ended
Stock Exchange. 30 April 2020 the Company
has not bought back
any shares and in the
same period, has issued
2,229,841 as a result
of market demand.
------------------------------- ------------------------------
To qualify and continue The Board receives This has been achieved
to meet the requirements regular financial information for every year since
for Sections 1158 and which discloses the launch in 1996.
1159 of the Corporation current and projected
Tax Act 2010 ('investment financial position HMRC has approved investment
trust status'). of the Company against trust status subject
each of the tests set to the Company continuing
out in Sections 1158 to meet the relevant
and 1159. eligibility conditions
and ongoing requirements.
The Directors believe
that the tests have
been met in the financial
year ended 30 April
2020 and will continue
to be met.
------------------------------- ------------------------------
Efficient operation The Board considers The Board has received
of the Company with annually the services and considered satisfactory
appropriate investment provided by the Investment the internal controls
management resources Manager, both investment report of the Investment
and services from third and administrative, Manager and other key
party suppliers within and reviews on a cycle suppliers including
a stable and risk controlled the provision of services contingency arrangements
environment. from to facilitate the ongoing
third parties including operations of the Company
the costs of their in the event of withdrawal
services. or failure of services.
The annual operating The ongoing charges
expenses are reviewed of the Company for
and any non-recurring the year ended 30 April
project related expenditure 2020 excluding the
approved by the Board. performance fee were
0.93% of net assets
(2019: 0.95%). The
ongoing charges including
the performance fee
payable in respect
of the year ended 30
April 2020 were 0.99%
(2019: 1.33%) of net
assets.
------------------------------- ------------------------------
PRINCIPAL RISKS AND UNCERTAINTIES
The Board is responsible for the management of risks faced by
the Company and, through delegation to the Audit Committee, has
established procedures to manage risk, oversee the internal control
framework and determine the nature and extent of the principal
risks the Company is willing to take in order to achieve its
long-term strategic objectives. The Audit Committee carries out, at
least annually, a robust assessment of the principal risks and
uncertainties with the assistance of the Investment Manager,
continually monitors identified risks and meets to discuss both
long-term and emerging risks outside of the normal cycle of Audit
Committee meetings.
A Risk management process has been established to identify and
assess various risks, their likelihood and the possible severity of
impact then, considering both internal and external controls and
factors that could provide mitigation, a post mitigation risk
impact score is determined. The Audit Committee has identified the
key risks faced by the Company which are those classified as having
the highest risk impact score post mitigation. The key risks are
detailed below with a high-level summary of the management through
mitigation and status arrows to indicate any change in assessment
over the past financial year.
The Audit Committee has also considered the risks posed by
COVID-19, which has been considered as a Black Swan event. As
discussed in the Chair's Statement and Investment Manager's Report,
the ramifications of COVID-19 thus far has not led to a
deterioration in the Company's performance, which has remained
robust. In the medium to long term when the societal and economic
results of COVID-19 materialise, it is expected that the risks that
arise from COVID-19 will become clearer and will feature in the
Committee's consideration of global geopolitical risk and its
potential effect on the risk of failure to achieve the investment
objective or performance that is satisfactory to our Shareholders.
Further information on how the Committee has considered COVID-19
when assessing its effect on the Company's ability to operate as a
going concern and the Company's longer-term viability can be found
in the Strategic Report and the Report of the Audit Committee
within the Annual Report. This also includes the Company's
forthcoming continuation vote.
Principal Risks and Uncertainties Management of risks through Mitigation
and Controls
PORTFOLIO RISK //
-----------------------------------------------
Failure to achieve Investment A detailed annual review of the investment
Objective; Breach of lenders strategy is undertaken by the Investment
covenants or AIFMD limits; Manager with the Board including analysis
and Portfolio management of investment markets and sector trends.
errors including breach Detailed reports containing financial
of investment policy. information including gearing and
Investment mandate falls cash balances are provided to each
out of favour and or the Board meeting and are used to assess
Investment Manager is unable portfolio construction and the degree
to deliver the Investment of risk which the Investment Manager
Objective. Leading to poor incurs to generate investment returns.
performance against the The Board regularly considers, in
benchmark or other metric, comparison to the sector and peers,
persistent discount in the level of premium and discount
excess of Board or Shareholder of the share price to the NAV and
acceptable levels, shrinkage ways to enhance Shareholder value
of assets or loss of liquidity. including share issuance and buy backs.
Breach of covenants and/or Investment limits and restrictions
limits may create a forced are encoded into the dealing and operations
liquidation of the portfolio systems of the Investment Manager
to repay debt and result and various oversight functions are
in the inability to renew undertaken to ensure there is early
borrowing facilities. Error warning of any potential issue of
or breach may cause regulatory compliance or regulatory matters.
investigation leading to The Board is committed to a clear
fines, reputational damage communication program to ensure Shareholders
and risk to investment understand the investment strategy.
trust status. A resolution is put forward every
Fundamental risk of investors five years to provide Shareholders
seeking alternative investments with an opportunity to vote on the
or lower risk strategies. continuation of the Company. The next
continuation resolution will be proposed
at the AGM to be held in September
2020. The Chair and Directors meet
with Shareholders through various
events and bespoke meetings through
the year.
-----------------------------------------------
OPERATIONAL RISK >>
-----------------------------------------------
Failure in services provided The Board carry out an annual review
by the Investment Manager, of internal control reports from suppliers
Custodian, Depositary or which includes the Investment Manager's
other service providers; cyber protocols and disaster recovery
Accounting, Financial or procedures. The Company has a disaster
Custody Errors; IT failure recovery plan in place along with
and Cyber Risk or 'Black a Black Swan Committee. Due diligence
Swan' Event and service reviews are undertaken
Failure of services resulting with third-party service providers
in regulatory investigation including the Custodian and Depository.
or financial loss, failure The number, severity and success rate
of trade settlement or of cyber-attacks have increased considerably
potential loss of Shareholder over recent years, controls are however
assets. in place and the Board proactively
Cyber-attack causing disruption seeks to keep abreast of developments
to or failure of operational through a series of meetings with
and accounting systems relevant service providers. In light
and processes provided of the COVID-19 pandemic and the lockdown
by the Investment Manager measures introduced by the UK Government,
creating an unexpected the Audit Committee sought assurance
event and / or adverse from each of the Company's service
impact on personnel or providers on the resilience of their
the portfolio. business continuity arrangements whilst
Material accounting errors the majority of their employees worked
or misstatements, including remotely. These assurances and the
inaccurate fee calculations. subsequent detailed updates that were
Mis-valuation of investments given to the Committee provided a
or the loss of assets. satisfactory level of assurance that
Incomplete or inaccurate there had not been, and there was
financial information potentially no anticipation of any disruption
causing failure to meet in the ability of each service provider
investment trust status. to fulfil their duties as would typically
Company is unable to recover be expected.
losses or make-good Shareholder A full review of the internal control
value. framework is carried out at least
Financial loss due to unexpected annually. Regular reporting is received
natural event disrupting by the Investment Manager on behalf
the ability to operate. of the Board from the Depositary on
the safe custody of the Company's
assets. The Board undertakes independent
reviews of the Depositary and external
Administrator services and additional
resources have been put in place by
the Investment Manager. Management
accounts are produced and reviewed
monthly, statutory reporting and daily
NAV calculations are produced by the
external Administrator and verified
by the Investment Manager. Accounting
records are tested, and valuations
verified independently as part of
the year-end financial reporting process.
-----------------------------------------------
REGULATORY RISK //
-----------------------------------------------
Breach of Statutes and The Board monitors regulatory change
Regulations including failure with the assistance of the Investment
to keep up with legislative Manager, Company Secretary and external
changes; failure to communicate professional suppliers and implements
significant events to Shareholders necessary changes should they be required.
Failure to comply with The Board receives regulatory reports
the FCA's Listing Rules for discussion and, if required, considers
and Disclosure Guidance the need for any remedial action.
and Transparency Rules; In addition, as an investment company,
not meeting the provisions the Company is required to comply
of s1158/1159 of the Corporation with a framework of tax laws, regulation
Tax Act 2010, the Companies (both UK and EU) and company law.
Act 2006 and other UK, The Board keeps abreast of third party
European and overseas legislation service provider internal controls
affecting UK companies processes to ensure requirements are
including MiFID II and met in accordance with regulatory
the GDPR. Not complying requirements.
with accounting standards
could result is a suspension
of listing or loss of investment
trust status, reputational
damage and Shareholder
activism.
Further risks arise from
not keeping abreast of
changes in legislation
and regulations which have
in recent years been substantial.
-----------------------------------------------
ECONOMIC AND GEOPOLITICAL >>
RISK
-----------------------------------------------
Global geopolitical risk; The Board regularly discusses the
'Brexit' global geo-political issues and general
There is significant exposure economic conditions and developments.
to the economic cycles Note 27 to the Financial Statements
and political movements within the Annual Report describes
of the markets in which the impact of changes in foreign exchange
the underlying investments rates. The Company's largest exposure
are listed. is to the level of US $ holdings.
The fluctuations of exchange Political changes in the US, Europe
rates may have a material and UK continue the uncertainty and
impact on Shareholder returns. volatility in financial markets. The
Political change affecting medium and longer term impacts of
economic stability may COVID-19 on this risk, for example
have an adverse effect the unprecedented levels of fiscal
on underlying valuations. stimulus and travel restrictions will
Uncertainty surrounding continue to be assessed by the Audit
the impact of any eventual Committee in light of how they may
exit of the UK from the affect the Company's portfolio and
European Union. the economic and geopolitical environment
Changes in trade and tariff in which the Company operates within
arrangements may affect overall.
valuations. The potential consequences of Brexit
Potential for the exit continue to be monitored through existing
arrangements to adversely control systems. Due to the high level
impact investee companies. of US investments (71.1%) and the
low level of UK investments (0.71%)
the Board does not believe that there
is likely to be any significant or
direct impact on the operation of
the Company or the structure of the
portfolio.
The Company has a varying level of
cash which is primarily held in US
Dollars and also has loan facilities
in Japanese Yen and US Dollars. Fluctuations
in exchange rates are monitored which
may impact investor returns. An analysis
of currency is given in Note 27 to
the Financial Statements within the
Annual Report.
-----------------------------------------------
KEY STAFF RISK //
-----------------------------------------------
Loss of Investment Manager The strength and depth of investment
or other key management team provides comfort that there is
professionals; Insufficient not over-reliance on one person with
resource or experience alternative senior technology portfolio
on the Board managers available to act if needed.
For each key business process roles,
Impact on investor confidence responsibilities and reporting lines
leading to widening of are clear and unambiguous.
the discount and/or poor The Investment Manager has implemented
performance creating a BCP arrangements as a result of COVID-19
period of uncertainty and with staff working remotely with no
potential termination of loss of service.
the Investment Management Respected recruiters are used to source
Agreement. suitably experienced candidates for
Inactivity by the Board non-executive directors. A Board,
when action is required Committee and Individual evaluation
leading to loss of Shareholder process is carried out annually and
value causing risk of Shareholder justification for re-election of Directors
activism. is provided in Annual Report to Shareholders.
-----------------------------------------------
//No change >>Increased <<Decreased
MANAGEMENT COMPANY AND MANAGEMENT OF THE PORTFOLIO
As the Company is an investment vehicle for Shareholders the
Directors have sought to ensure that the business of the Company is
managed by a leading specialist investment management team and that
the investment strategy remains attractive to Shareholders.
The Directors believe that a strong working relationship with
the investment management team will help to achieve the optimum
return for Shareholders.
Investment team
The Investment Manager is Polar Capital LLP ('Polar Capital'),
which is authorised and regulated by the Financial Conduct
Authority.
Under the terms of the investment management agreement Polar
Capital provides investment management, and provides and procures
accounting, company secretarial and administrative services.
Polar Capital provides a team of technology specialists led by
Ben Rogoff. Each team member focuses on specific areas while Ben
has overall responsibility for the portfolio. Polar Capital also
has other specialist and geographically focused investment teams
which may contribute to idea generation. The team's biographies can
be found in the Annual Report and on the Company's website.
Termination arrangements
The investment management agreement may be terminated by either
party giving 12 months' notice, but under certain circumstances the
Company may be required to pay up to one year's management charges
if immediate notice is given and compensation will be on a sliding
scale if less than 12 months' notice is given.
Fee arrangements
On 15 April 2019 the Company announced revised fee arrangements
which came into force on 1 May 2019.
Performance periods will coincide with the Company's accounting
periods. In the event of a termination of the investment management
agreement, the date the agreement is terminated will be deemed to
be the end of the relevant performance period and any performance
fee payable shall be calculated as at that date.
Management fees of GBP18,273,000 (2019: GBP15,341,000) have been
paid for the year to 30 April 2020 of which GBPnil (2019:
GBP3,876,000) was outstanding at the year end. A performance fee of
GBP1,050,000 has been earned for the year to 30 April 2020 (2019:
GBP6,644,000), and the whole of this amount (2019: whole amount)
was outstanding at the year end.
Management fee
The base management fee, which is paid by the Company quarterly
in arrears to the Manager, is calculated on the Net Asset Value
('NAV') on a per share basis as follows:
Tier 1 1 per cent. for such of the NAV as exceeds GBP0
but is less than or equal to GBP800 million;
Tier 2 0.85 per cent. for such of the NAV as exceeds
GBP800 million but is less than or equal to GBP1.6
billion;
----------------------------------------------------
Tier 3 0.80 per cent. for such of the NAV as exceeds
GBP1.6 billion but is less than or equal to GBP2
billion; and
----------------------------------------------------
Tier 4 0.70 per cent. for such of the NAV as exceeds
GBP2 billion.
----------------------------------------------------
Any investments in funds managed by Polar Capital are wholly
excluded from the base management fee calculation. In addition to
the base management fee, the Investment Manager may be entitled to
receive a performance fee as detailed below.
Performance fee
The performance fee participation rate is 10 per cent. of
outperformance above the Benchmark, subject to a cap on the amount
which may be paid out in any one year of 1 per cent. of NAV. Any
amount over the 1 per cent. payment is written off.
Calculation
A notional performance fee entitlement ('NPFE') is calculated
and accrued daily (if positive) having made up all past
underperformance; however, it is only at the financial year end
that the payment of the performance fee is tested.
The calculation period starts at the end of the financial year
in which the last performance fee was paid and is open until the
end of the financial year that the next performance fee is
paid.
The 1 per cent. cap is applied as part of the NAV calculation so
the performance fee accrual will never exceed 1 per cent. of the
NAV.
All underperformance must be made good before a fee may be
paid.
Payment conditions
On the final day of each financial year the NPFE will be
tested.
If the NPFE is positive, then a performance fee may be paid to
the Manager if the following conditions have been achieved:
-- There has been outperformance of the Benchmark in the financial year;
-- The NAV per share at the financial year end is equal to or
higher than the NAV per share when the last performance fee was
paid; and
-- The NAV per share at the financial year end is equal to or
higher than the NAV per share at the beginning of the financial
year.
If the NPFE is negative, then no performance fee is paid, and
the calculation period remains open. If the NPFE is negative, then
no performance fee is paid, and the calculation period remains
open.
Other
In addition to the above, the Investment Manager is responsible
for the first GBP100,000 of marketing costs and all research
costs.
CONTINUED APPOINTMENT OF INVESTMENT MANAGER
The Board, through the Management Engagement Committee, has
reviewed the performance of the Investment Manager in managing the
portfolio over the longer-term. The review also considered the
quality of the other services provided by the Investment Manager,
including the strength of the investment team, the depth of the
other services provided by the Investment Manager and the resources
available to provide such services.
We are pleased to see the continued recruitment into the teams
to support the Company, which includes the organisation on the
Company's behalf of thirdparty suppliers, and the quality of the
Shareholder communications.
The Board, on the recommendation of the Management Engagement
Committee, has concluded that on the basis of longer-term
performance, it is in the best interests of Shareholders as a whole
that the appointment of Polar Capital LLP as Investment Manager is
continued on the terms agreed on 12 April 2019, effective 1 May
2019.
LONGER-TERM VIABILITY
In accordance with the AIC Code of Corporate Governance, the
Company is required to make a forward-looking longer-term viability
statement. The Board has considered and addressed the ability of
the Company to continue to operate over a period significantly
beyond the twelve-month period required for the going concern
statement. The Board has considered the industry and market in
which the Company operates and the continued appetite for
technology investment. The Board continues to use five years as a
reasonable term over which the viability of the Company should be
viewed; Shareholders have the opportunity to vote on the
continuation of the Company every five years, therefore the outlook
for the next five-year period incorporates the continuation vote
which will be put to Shareholders at the AGM in 2020. The process
and matters considered in establishing the longer-term viability
are detailed within the Audit Committee Report in the Annual
Report.
In establishing the positive outlook for the Company over the
next five years to 30 April 2025, the Board has taken into
account:
The ability The financial position of the Company and its
of the Company cash flows and liquidity position are described
to meet its in the Strategic Report and the Financial Statements.
liabilities Note 27 to the Financial Statements within the
as they fall Annual Report, includes the Company's policies
due and process for managing its capital; its financial
risk management objectives; details of financial
instruments and hedging activities. Exposure to
credit risk and liquidity risk are also disclosed.
The portfolio comprises investments traded on
major international stock exchanges, there is
a spread of investments by size of company.
The assessment took account of the Company's current
financial position, its cash flows and its liquidity
position, the principal risks as set out above,
and the Committee's assessment of any material
uncertainties and events that might cast significant
doubt upon the Company's ability to continue as
a going concern. The assessment was then subject
to a sensitivity analysis over a five-year period,
which stress tested a number of the key assumptions
underlying the forecasts both individually and
in aggregate for normal, favourable and stressed
conditions and considered whether financing facilities
will be renewed. COVID-19 was also factored into
the key assumptions made by assessing its impact
on the Company's key risks and whether the key
risks had increased in their potential to affect
the normal, favourable and stressed market conditions.
99.93% of the current portfolio could be liquidated
within seven trading days and there is no expectation
that the nature of the investments held within
the portfolio will be materially different in
future.
The expenses of the Company are predictable and
modest in comparison with the assets and there
are no capital commitments foreseen which would
alter that position.
Repayment of the bank facilities, drawn down at
the year end, and due in October 2020, would equate
to approximately 39% of the cash or cash equivalents
available to the Company at 30 April 2020, without
having to liquidate the portfolio of investments.
The Company has no employees and consequently
does not have redundancy or other employment related
liabilities or responsibilities.
The Company Under the AIC SORP, where Shareholders have the
will propose opportunity to vote in favour or against a company
a resolution continuing in existence, it will normally be the
on the continuation case that Shareholders will have to vote in favour
of the Company of a liquidation before it can occur. It is reasonable
at the AGM in to believe that if good performance is achieved
September 2020 over the period until the next continuation vote
Shareholders will vote in favour of continuation.
The Board, Investment Manager and Corporate Broker
have sought Shareholder's views on the Company
and its proposed continuation. No comments adverse
to the continuation of the Company were received
and the Shareholders who provided feedback indicated
that they would vote in favour of the resolution
for the Company to continue. Further details on
the engagement with Shareholders can be found
in the s172 Statement below.
--------------------------------------------------------
Factors impacting The Strategic Report section, comprising the Chair's
the forthcoming Statement, the Investment Manager's Report and
years the Strategic Report provide a comprehensive review
of factors which may impact the Company in forthcoming
years. In making its assessment, the Board considered
these factors alongside the Principal Risks and
Uncertainties, and their corresponding mitigation
and controls, as set out above.
--------------------------------------------------------
Regulatory Despite the increased level of regulation and
changes the unpredictability of future requirements it
is considered that regulation will not increase
to a level that makes the running of the Company
uneconomical in comparison to other competitive
products.
That the business model of being a closed ended
investment fund will continue to be wanted by
investors and the investment objective will continue
to be desired and achievable.
--------------------------------------------------------
Further, the Board recognises that there has been considerable
growth in the technology sector and immense change in what is
deemed to be a technology company which broadens the universe for
potential investment. Technology remains a specialist sector for
which there continues to be a need for independent specialist
sector investment expertise. In the light of the COVID-19 pandemic
technology has become the backbone of society, with the majority of
people moving to remote working situations relying on technology,
not only for day to day requirements but for communications across
a variety of platforms. It is anticipated that many of the new
practices put in place, utilising technology, may remain in place
long after the pandemic has abated.
The Board therefore believe it appropriate to confirm their
assessment for the longer-term viability of the Company for the
next five years to 30 April 2025.
GOING CONCERN
The Board has also considered the ability of the Company to
adopt the Going Concern basis for the preparation of the Financial
Statements.
Consideration included the Company's current financial position,
its cash flows, its liquidity position and its assessment of any
material uncertainties and events that might cast significant doubt
upon the Company's ability to continue as a going concern. In
conjunction with the financial considerations taken into account
when reviewing the longer-term viability, the Board considered the
Company's performance (net assets +18.6%), outperformance of the
benchmark (+0.5%); the liquidity of the portfolio (an estimated
99.93% can be liquidated over seven days) and the opportunity for
investment and reinvestment of funds. The Board believe that the
Company is able to continue in operation and meet its liabilities
as they fall due over the next twelve-month period from the date of
this Report and it is appropriate to present the Company and the
Financial Statements as a Going Concern.
As highlighted in the Longer-Term Viability and s172 Statements,
the Board has considered the likelihood of the Company's
continuation vote being passed at the AGM. In consideration of the
Company's performance and the views collated from Shareholders, the
Board are in agreement that the continuation vote does not impact
the Company's ability to prepare the Financial Statements on a
going concern basis.
In reaching these conclusions and those in the Longer-Term
Viability Statement, the stress testing conducted also featured
consideration of the effects of COVID-19. This is discussed further
in the Report of the Audit Committee in the Annual Report.
CORPORATE RESPONSIBILITY
Environment and Greenhouse Gas Emissions
The Company's core activities are undertaken by its Investment
Manager which seeks to limit the use of non renewable resources and
reduce waste where possible.
The Companies Act 2006 (Strategic Report and Directors' Reports)
Regulations 2013 require companies listed on the Main Market of the
London Stock Exchange to report on the greenhouse gas ('GHG')
emissions for which they are responsible. The Company is an
investment trust, with neither employees nor premises, nor has it
any financial or operational control of the assets which it owns.
Consequently, it has no GHG emissions to report from its operations
nor does it have responsibility for any other emissions.
Diversity and Human Rights
The Company has no employees and the Board is comprised of two
female and three male Non-executive Directors.
When new appointments are made to the Board, the Board will
continue to have regard to the benefits of diversity, including
gender, when seeking to make any such appointments. The Board's
Diversity Policy is discussed further in the Report on Corporate
Governance in the Annual Report.
The Company has not adopted a policy on human rights as it has
no employees or operational control of its assets.
Modern Slavery Act
As an investment company, the Company does not provide goods or
services in the normal course of business and does not have any
customers. Accordingly, the Company does not meet the criteria
requiring it to produce a statement under the Modern Slavery Act
2015.
Anti-bribery, Corruption and Tax Evasion
The Board has adopted a zero-tolerance policy (which is
available on the Company's website) to bribery, corruption and the
facilitation of tax evasion in its business activities. The Board
uses the principles of the policies formulated and implemented by
the Investment Manager and expects the same standard of
zero-tolerance to be adopted by third-party service providers.
Directors' Duties
SECTION 172 OF THE COMPANIES ACT 2006
The statutory duties of the Directors are listed in s171-177 of
the Companies Act 2006. Under s172, Directors have a duty to
promote the success of the Company for the benefit of its members
(our Shareholders) as a whole and in doing so have regard to the
consequences of any decision in the long term, as well as having
regard to the Company's stakeholders amongst other considerations.
The fulfilment of this duty not only helps the Company achieve its
Investment Objective but ensures decisions are made in a
responsible and sustainable way for Shareholders.
To ensure that the Directors are aware of, and understand, their
duties, they are provided with an induction, including details of
all relevant regulatory and legal duties as a Director when they
first join the Board, and continue to receive regular and ongoing
updates on relevant legislative and regulatory developments. They
also have continued access to the advice and services of the
Company Secretary and, when deemed necessary, the Directors can
seek independent professional advice. The Schedule of Matters
Reserved for the Board, as well as the Terms of Reference of its
committees are reviewed annually and further describe Directors'
responsibilities and obligations and include any statutory and
regulatory duties.
The Board seeks to understand the needs and priorities of the
Company's stakeholders and these are taken into account during all
of its discussions and as part of its decision-making. As an
externally managed investment company, the Company does not have
any employees or customers, however the key stakeholders and a
summary of the Board's consideration and actions where possible in
relation to each group of stakeholders are described below.
SHAREHOLDERS
Engagement
The Directors have considered this duty when making the
strategic decisions during the year that affect Shareholders,
including the renewal of the gearing facilities, the continued
appointment of the Investment Manager and the recommendation that
Shareholders vote in favour of the resolutions for the Company to
continue and to renew the allotment and buy back authorities at the
AGM. The Directors have also engaged with and taken account of
Shareholders' interests during the year.
A number of meetings have been held over the last year, and in
particular, one event in December 2019 attracted representatives of
over 40% of the Shareholder base, this event was first held in 2018
and was expected to be held again in 2020, however given current
guidance from the UK government in respect of gatherings of people
we expect that it may not be possible this year. In addition, the
Chair writes to the Company's largest Shareholders following the
publication of the Annual Report and Financial Statements offering
the opportunity to have a meeting. In 2018/19 the Chair received
one response to this contact and no concerns were raised.
Since the year end, and given the continued measures in place in
relation to social distancing and COVID-19, the Directors have
carefully considered the viability of an open forum AGM. As
detailed in the Chair's Statement the safety and wellbeing of all
involved is of the highest priority while expressing that
Shareholder engagement is of utmost importance to the Directors. It
has therefore been decided that the AGM will be held in a virtual
manner for this year with every effort being made to ensure
Shareholders will be able to participate and engage with both the
Board and the Investment Manager. Full details will be provided in
the Notice of AGM.
Relations with Shareholders
The Board and the Manager consider maintaining good
communications and engaging with Shareholders through meetings and
presentations a key priority.
The Board regularly considers the share register of the Company
and receives regular reports from the Manager and the Corporate
Broker on meetings attended with Shareholders and any concerns that
are raised in those meetings. The Board also reviews correspondence
from Shareholders and may attend investor presentations.
Shareholders are able to raise any concerns directly with the
Board without using the Manager or Company Secretary as a conduit.
The Chair or other Directors are available to Shareholders who wish
to raise matters either in person or in writing. The Chair and
Directors may be contacted through the registered office of the
Company.
Shareholders are kept informed by the publication of annual and
half year reports, monthly fact sheets, access to commentary from
the Investment Manager via the Tech Talk section of the Company's
website and attendance at events in which the Investment Manager
presents.
The Board is also keen that the AGM be a participative event for
all Shareholders who attend. The investment manager gives a
presentation and the Chairs of the Board and of the Committees
attend and are available to respond to questions and concerns from
Shareholders.
Should any significant votes be cast against a resolution, the
Board will engage with Shareholders. Should this situation occur,
the Board will explain in its announcement of the results of the
AGM the actions it intends to take to consult Shareholders in order
to understand the reasons behind the votes against. Following the
consultation, an update will be published no later than six months
after the AGM and the Annual Report will detail the impact the
Shareholder feedback has had on any decisions the Board has taken
and any actions or
resolutions proposed.
The Company, through the sales and marketing efforts of the
Investment Manager, encourages retail investor platforms to engage
with underlying Shareholders in relation to Company communications
and enabling those Shareholders to cast their votes on Shareholder
resolutions; the Company however has no responsibility over such
platforms. The Board therefore encourage Shareholders invested via
the platforms to regularly visit the Company's website or to make
contact with the Company directly to obtain copies of Shareholder
communications.
The Company has also made arrangements with its registrar for
Shareholders, who own their shares directly rather than through a
nominee or share scheme, to view their account online at
www.shareview.co.uk. Other services are also available via this
service.
Outcomes and strategic decisions during the year
Share Issuance
In order to satisfy demand for the Company's shares that the
secondary market is unable to meet, the Company has used the
authority granted by Shareholders to allot shares fully paid for
cash. This assists with ensuring the Company's share price does not
reach an excessive premium to its net asset value per share and
provides the Investment Manager with further capital to invest in
line with the stated Investment Policy. Further information on the
shares issued during the year can be found in the Directors' Report
and the Notes to the Financial Statements in the Annual Report.
The Company also has the facility to conduct share buy backs
when, in normal market conditions, it is in the best interests of
Shareholders to do so.
Gearing
The Company is aware of the positive effect that leverage can
have in increasing the return to Shareholders when utilised. The
Company has term loans with ING Bank NV, which expire in October
2020 and consideration will be given to the renewal of or the
replacement of the term loans if it is deemed to be in the best
interests of the Company's Shareholders in maximising returns. In
October 2019, the Company's one year revolving credit facility
expired and was not renewed or replaced.
Continuation Vote
Following consultation with Shareholders, the Board considers
that it is in Shareholders' best interests to vote at the AGM in
favour of the Company. The Company's performance has been strong
and provides Shareholders with exposure to the technology sector as
set out in the Investment Objective. The Board, Investment Manager
and Corporate Broker sought the feedback of Shareholders, including
any concerns, and an indication of whether they were likely to vote
in favour of the Company's continuation. The feedback received was
positive and highlighted the contact between the Investment Manager
and Shareholders, the long term investment of many Shareholders,
the diversification of the Company's register of Shareholders and
the Company's inclusion on many buy lists at private wealth
managers and retail platforms.
In arriving at this decision, the Board also had regard to its
service providers, including the Investment Manager and the outlook
for the sector as a whole.
Directors Remuneration
The new Remuneration Policy, which is subject to approval by
Shareholders at the AGM, has been drafted in consideration of the
need to attract and retain the necessary calibre of Director for
the Company. More information on the Policy and the Directors'
rationale for the level of fees set can be found in the
Remuneration Implementation Report in the Annual Report.
THE INVESTMENT MANAGER
Engagement
Through the Board meeting cycle, regular updates and the work of
the Management Engagement Committee reviewing the services of the
Investment Manager twice yearly, the Board is able to safeguard
Shareholder interests by:
- Ensuring adherence to the Investment Policy;
- Ensuring excessive risk is not undertaken in the pursuit of
investment performance;
- Ensuring adherence to the Investment Management Policy and
reviewing the agreed management and performance fees;
- Reviewing the Investment Manager's decision making and
consistency in investment process; and
- Considering the succession plans for the Technology Team in
ensuring the continued provision of portfolio management
services.
Maintaining a close and constructive working relationship with
the Manager is crucial as the Board and the Investment Manager both
aim to continue to achieve consistent, long-term returns in line
with the Investment Objective. The culture which the Board
maintains to ensure this involves encouraging open discussion with
the Investment Manager; recognising that the interests of
Shareholders and the Investment Manager are aligned, providing
constructive challenge and making Directors' experience available
to support the Investment Manager. This culture is aligned with the
collegiate and meritocratic culture which Polar Capital has
developed and maintains.
Outcomes and strategic decisions during the year
The Management Engagement Committee has recommended the
continued appointment of the Investment Manager on the terms agreed
within the Investment Management Agreement.
INVESTEE COMPANIES
Stewardship
The Board has instructed the Investment Manager to take into
account the published corporate governance policies of the
companies in which it invests.
The Board has also considered the Investment Manager's
Stewardship Code and Proxy Voting Policy. The Voting Policy is for
the Investment Manager to vote at all general meetings of companies
in favour of resolutions proposed by the management where it
believes that the proposals are in the interests of Shareholders.
However, in exceptional cases, where it believes that a resolution
could be detrimental to the interests of Shareholders or the
financial performance of the Company, appropriate notification will
be given and abstentions or a vote against will be lodged.
The Investment Manager reports to the Board, when requested, on
the application of the Stewardship Code and Voting Policy. The
Investment Manager's Stewardship Code and Voting Policy can be
found on the Investment Manager's website in the Corporate
Governance section (www.polarcapital.co.uk).
The Technology Team also use the services of ISS to assist with
their own evaluation of companies proposals or reporting ahead of
casting votes on behalf of the Company at their general meetings.
During the year ended 30 April 2020, votes were cast at 96.4% of
investee company general meetings held. At 52.68% of those meetings
a vote was either cast against management recommendation, withheld
or abstained from. In terms of total proposals, votes in line with
management recommendation totaled 85.37% and 14.63% against
management recommendation.
Further information on how the Investment Manager considers ESG
in its engagement with investee companies can be found above.
Outcomes and strategic decisions during the year
During the year the Board discussed the impact of ESG and how
the Investment Manager factors it into its decision making. The
Board also considered the views of Shareholders on the topic at the
event held in December 2019.
SERVICE PROVIDERS
Engagement
The Directors have frequent engagement with the Company's other
service providers through the annual cycle of reporting and due
diligence meetings or site visits. This engagement is completed
with the aim of having effective oversight of delegated services,
seeking to improve the processes for the benefit of the Company and
to understand the needs and views of the Company's service
providers, as stakeholders in the Company. Further information on
the Board's engagement with service providers is included in the
Corporate Governance Statement and the Report of the Audit
Committee.
Outcomes and strategic decisions during the year
The reviews of the Company's service providers, including
Equiniti and Stifel Nicolaus have been positive and the Directors
believe their continued appointment is in the best interests of the
Company.
The services of HSBC Securities Services (HSS) are contracted
through Polar Capital and provided to the Company under the terms
of the IMA. The Board however continue to conduct due diligence
service reviews in conjunction with the Company Secretary and is
satisfied that the service received continues to be of a high
standard.
PROXY ADVISORS
Engagement
The support of the major institutional investors and proxy
adviser agencies are important to the Directors, as the Company
seeks to retain a reputation for high standards of corporate
governance, which the Directors believe contributes to the
long-term sustainable success of the Company. The Director consider
the recommendations of these various proxy voting agencies when
contemplating decisions that will affect Shareholders and also when
reporting to Shareholders through the Half Year and Annual
Reports.
Recognising the principles of stewardship, as promoted by the UK
Stewardship Code, the Board welcomes engagement with all of its
investors. The Board recognises that the views, questions from, and
recommendations of many institutional investors and proxy adviser
agencies provide a valuable feedback mechanism and play a part in
highlighting evolving Shareholders' expectations and concerns.
Prior to AGMs, the Company engages with these agencies to fact
check their advisory reports and clarify any areas or topics that
the agency requests. This ensures that whilst the proxy advisory
reports provided to Shareholders are objective and independent, the
Company's actions and intentions are represented as clearly as
possible to assist with Shareholders' decision making when
considering the resolutions proposed at the AGM.
Outcomes and strategic decisions during this year
The Nomination Committee considers the time commitment required
of Directors and the Board considers each Directors' independence
on an ongoing basis. The Directors have also considered the proxy
adviser agencies policies on overboarding when Directors' request
approval for additional appointments and when recruiting new
Directors. The Board have confirmed that all Directors remain
independent and able to commit sufficient time in fulfilling their
duties, including those listed on s172 of the Companies Act.
Accordingly, all Directors, with the exception of Peter Hames who
retired from the Board on 8 July 2020, are standing for re-election
at the Company's AGM.
THE AIC
Engagement
The Company is a member of the AIC and has also supported
lobbying activities such as the consultation on the 2019 AIC Code.
The Directors also cast votes in the AIC Board Elections each year
and regularly attend AIC events.
Approved by the Board on 13 July 2020
By order of the Board
Tracey Lago, FCG
Polar Capital Secretarial Services Limited
Company Secretary
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report
and Financial Statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law they are
required to prepare the financial statements in accordance with
International Financial Reporting Standards (IFRSs) as adopted by
the European Union ('EU').
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Company and of its profit or
loss for that period. In preparing these Financial Statements, the
Directors are required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable and prudent;
-- state whether applicable IFRSs have been followed, subject to
any material departures disclosed and explained in the financial
statements;
-- assess the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern;
and
-- use the going concern basis of accounting unless they either
intend to liquidate the Company or to cease operations, or have no
realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
its financial statements comply with the Companies Act 2006. They
are responsible for such internal control as they determine is
necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error,
and have general responsibility for taking such steps as are
reasonably open to them to safeguard the assets of the Company and
to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors' Report,
Directors' Remuneration Report and Corporate Governance Statement
that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website.
Legislation in the UK governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE
ANNUAL REPORT AND FINANCIAL STATEMENTS
We confirm that to the best of our knowledge:
-- the Financial Statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the Company; and
-- the Strategic Report includes a fair review of the
development and performance of the business and the position of the
Company, together with a description of its principal risks and
uncertainties.
We consider the Annual Report and Financial Statements, taken as
a whole, is fair, balanced and understandable and provides the
information necessary for Shareholders to assess the Company's
position and performance, business model and strategy.
Sarah Bates
Chair
13 July 2020
Status of announcement
The figures and financial information contained in this
announcement are extracted from the Audited Annual Report for the
year ended 30 April 2020 and do not constitute statutory accounts
for the year. The Annual Report and Financial Statements include
the Report of the Independent Auditors which is unqualified and
does not contain a statement under either section 498(2) or Section
498(3) of the Companies Act 2006.
The Annual Report and Financial Statements for the year ended 30
April 2020 have not yet been delivered to the Registrar of
Companies. The figures and financial information for the year ended
30 April 2019 are extracted from the published Annual Report and
Financial Statements for the year ended 30 April 2019 and do not
constitute the statutory accounts for that year. The Annual Report
and Financial Statements for the year ended 30 April 2019 have been
delivered to the Registrar of Companies and included the Report of
the Independent Auditors which was unqualified and did not contain
a statement under either section 498(2) or Section 498(3) of the
Companies Act 2006.
STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 April 2020
Y e a r e n ded 30 Y e a r e n ded 30
A p r il 2020 A p r il 2019
========================= ===== ============================ ============================
R evenue
retu rn Capital Total Revenue Capital Total
GBP' return return return return return
Notes 000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
========================= ===== ======== ======== ======== ======== ======== ========
I nve s tment income 3 15,761 - 15,761 11,965 - 11,965
========================= ===== ======== ======== ======== ======== ======== ========
O t her op e r a ting
income 4 1,125 - 1,125 1,105 - 1,105
========================= ===== ======== ======== ======== ======== ======== ========
G a i ns on inves tme
n ts held at fair value 5 - 348,118 348,118 - 393,226 393,226
========================= ===== ======== ======== ======== ======== ======== ========
G a i ns on de r iv a
t ives 6 - 13,214 13,214 - 1,470 1,470
========================= ===== ======== ======== ======== ======== ======== ========
O t her cu rrency ga ins 7 - 5,251 5,251 - 1,913 1,913
========================= ===== ======== ======== ======== ======== ======== ========
T ot al income 16,886 366,583 383,469 13,070 396,609 409,679
================================ ======== ======== ======== ======== ======== ========
E xp enses
================================ ============================ ============================
I nve s tment management
f ee 8 (18,273) - (18,273) (15,341) - (15,341)
========================= ===== ======== ======== ======== ======== ======== ========
Per formance f ee 8 - (1,050) (1,050) - (6,644) (6,644)
========================= ===== ======== ======== ======== ======== ======== ========
O t her adminis t r a
t ive e xp ens es 9 (951) - (951) (1,140) - (1,140)
========================= ===== ======== ======== ======== ======== ======== ========
T ot al e x penses (19,224) (1,050) (20,274) (16,481) (6,644) (23,125)
================================ ======== ======== ======== ======== ======== ========
( L os s)/profit b efore
finance costs and tax (2,338) 365,533 363,195 (3,411) 389,965 386,554
================================ ======== ======== ======== ======== ======== ========
F i nance cos ts (1,260) - (1,260) (1,090) - (1,090)
========================= ===== ======== ======== ======== ======== ======== ========
( L os s)/profit before t
ax (3,598) 365,533 361,935 (4,501) 389,965 385,464
================================ ======== ======== ======== ======== ======== ========
T a x (1,833) - (1,833) (1,827) - (1,827)
========================= ===== ======== ======== ======== ======== ======== ========
Net (loss)/profit for the
year and total comprehensive
(expense)/income (5,431) 365,533 360,102 (6,328) 389,965 383,637
================================ ======== ======== ======== ======== ======== ========
( L os ses)/earnings
per share ( b asic and
dilut e d) ( penc e) 11 (4.06) 273.12 269.06 (4.73) 291.41 286.68
========================= ===== ======== ======== ======== ======== ======== ========
The total column of this statement represents the Company's
Statement of Comprehensive Income, prepared in accordance with IFRS
as adopted by the European Union.
The revenue return and capital return columns are supplementary
to this and are prepared under guidance published by the
Association of Investment Companies.
All items in the above statement derive from continuing
operations. The Company does not have any other comprehensive
income.
The notes below form part of these Financial Statements.
STATEMENT OF CHANGES IN EQUITY
for the year ended 30 April 2020
Sp ecial
C ap ital no n -
redem ption distr ibutable C ap R evenue
Share re s e Share re s e ital re re s e T o ta
c apital rve premium rve s e rves rve l
GBP' GBP' GBP' GBP'
Notes 000 GBP' 000 000 GBP' 000 000 000 GBP' 000
==================== ===== ========= ============ =========== =============== ========= ========== ===========
1 5 1 , ( 8
T ot al equity 3 7 , 4 2 7 ,
at 30 April 3 , 1 2 , 8 4 7 7 , 5 3 8,2 88 3 1 ,5 5 1
2018 4 49 0 2 7 6 3 0 ) , 6 11
==================== ===== ========= ============ =========== =============== ========= ========== ===========
Total comprehensive
income/(expense):
==================== ===== ========= ============ =========== =============== ========= ========== ===========
P rofit / (los
s) for the year
t o 30 Apr il
2019 - - - - 389,965 (6,328) 383,637
==================== ===== ========= ============ =========== =============== ========= ========== ===========
Transactions with
owners, recorded
directly to equity:
==================== ===== ========= ============ =========== =============== ========= ========== ===========
Issue of or d ina
ry shares 12 7 - 391 - - - 398
==================== ===== ========= ============ =========== =============== ========= ========== ===========
T ot al equity
at 30 April
2019 33,456 12,802 157,868 7,536 1,818,195 (94,211) 1,935,646
==================== ===== ========= ============ =========== =============== ========= ========== ===========
Total comprehensive
income/(expense):
==================== ===== ========= ============ =========== =============== ========= ========== ===========
Profit/(loss)
for the year
to 30 April
2020 - - - - 365,533 (5,431) 360,102
==================== ===== ========= ============ =========== =============== ========= ========== ===========
Transactions with
owners, recorded
directly to equity
==================== ===== ========= ============ =========== =============== ========= ========== ===========
Issue of or
d ina ry shares 12 185 - 12,664 - - - 12,849
==================== ===== ========= ============ =========== =============== ========= ========== ===========
T o tal e quity
at 30 Apr il
2020 33,641 12,802 170,532 7,536 2,183,728 (99,642) 2,308,597
-------------------- ----- --------- ------------ ----------- --------------- --------- ---------- -----------
The notes below form part of these Financial Statements.
BALANCE SHEET
as at 30 April 2020
3 0 A p 3 0 A p r
r il 2020 il 2019
Notes GBP '000 GBP '000
=================================== =========== =================== =======================
Non-current assets
================================================ =================== =======================
I nves tme n ts held at f a ir
v alue through profit or loss 2,218,307 1,803,242
=================================== =========== =================== =======================
C ur rent a s sets
================================================ =================== =======================
R e c e i v a bles 47,186 36,494
=================================== =========== =================== =======================
O ve r seas tax re cove r able 94 69
================================================ =================== =======================
C ash and cash e qu i v alen ts 10 146,677 194,544
=================================== =========== =================== =======================
D e ri v a t i ve financi al ins
t r ume n ts 3,391 150
=================================== =========== =================== =======================
197,348 231,257
================================================ =================== =======================
T ot al as sets 2,415,655 2,034,499
================================================ =================== =======================
Current liabilities
================================================ =================== =======================
P ay ables (50,034) (44,775)
=================================== =========== =================== =======================
Bank loans (57,024) -
=================================== =========== =================== =======================
B an k overdraft 10 - (391)
=================================== =========== =================== =======================
(107,058) (45,166)
=================================== =========== =================== =======================
Non-current liabilities
=================================== =========== =================== =======================
Bank loans - (53,687)
=================================== =========== =================== =======================
Net assets 2,308,597 1,935,646
================================================ =================== =======================
Equity attributable to equity Shareholders
================================================ =================== =======================
Share c apital 12 33,641 33,456
=================================== =========== =================== =======================
C a pital redemp tion re serve 12,802 12,802
=================================== =========== =================== =======================
Share pre mium 170,532 157,868
=================================== =========== =================== =======================
Speci al non- dis t r ibutable
re s e rve 7,536 7,536
=================================== =========== =================== =======================
C a pital re s e rves 2,183,728 1,818,195
=================================== =========== =================== =======================
R evenue re serve (99,642) (94,211)
=================================== =========== =================== =======================
Total equity 2,308,597 1,935,646
================================================ =================== =======================
Net asset value per ordinary share
(pence) 14 1715.59 1446.40
=================================== =========== =================== =======================
The Financial Statements were approved and authorised for issue
by the Board of Directors on 13 July 2020 and signed on its behalf
by:
Sarah Bates
Chair
The notes below form part of these Financial Statements.
Registered number 3224867
CASH FLOW STATEMENT
for the year ended 30 April 2020
2020 2019
Notes GBP '000 GBP '000
============================================ ======= ======================= ======================
C ash flows from operating acti vities
============================================ ======= ======================= ======================
Profit b e fore tax 361,935 385,464
============================================ ======= ======================= ======================
A d j us tme n t s:
============================================ ======= ======================= ======================
G a i ns on inves tme n ts held at
f a ir v alue through profit or loss 5 (348,118) (393,226)
============================================ ======= ======================= ======================
G a i ns on de ri v a t ive financi
al ins t r ume n ts 6 (13,214) (1,470)
============================================ ======= ======================= ======================
P ro c eeds of dis pos al on inve
s tmen ts 1,803,352 1,228,104
============================================ ======= ======================= ======================
Purchases of investments (1,862,499) (1,145,393)
============================================ ======= ======================= ======================
P ro c eeds on dis pos al of de ri
v a t ive financi al ins t r ume n
ts 66,075 23,134
============================================ ======= ======================= ======================
P u rchas es of de ri v a t ive financi
al ins t r ume n ts (56,102) (19,445)
============================================ ======= ======================= ======================
Increase in receivables (241) (329)
============================================ ======= ======================= ======================
Decrease in pay ables (9,444) (773)
============================================ ======= ======================= ======================
O ver seas tax (1,858) (1,877)
============================================ ======= ======================= ======================
F oreign e xchange gains 7 (5,251) (1,913)
============================================ ======= ======================= ======================
Net c ash (used in)/ generat e d from
operating acti vities (65,365) 72,276
============================================ ======= ======================= ======================
Cash flows from financing activities
============================================ ======= ======================= ======================
Loans repaid - (36,471)
============================================ ======= ======================= ======================
Loans drawn - 52,847
============================================ ======= ======================= ======================
Issue of or dina ry shares 9,301 398
============================================ ======= ======================= ======================
Net cash generated from financing
activities 9,301 16,774
============================================ ======= ======================= ======================
Net (decrease)/increase in cash and
cash equivalents (56,064) 89,050
============================================ ======= ======================= ======================
C ash and cash e qu i v alen ts at
the be ginning of the year 194,153 101,156
============================================ ======= ======================= ======================
E f f e c t of moveme nt in foreign
e xchange r at es on cash held 7 8,588 3,947
============================================ ======= ======================= ======================
Cash and cash equivalents at the end
of the year 10 146,677 194,153
============================================ ======= ======================= ======================
2020 2019
Notes GBP '000 GBP '000
============================================ ======= ======================= ======================
Reconciliation of cash and cash equivalents
to the Balance Sheet is as follows:
============================================ ======= ======================= ======================
Cash at bank 10 109,715 194,153
============================================ ======= ======================= ======================
BlackRock's Institutional Cash Series
plc
(US Treasury Fund), money market
fund 10 36,962 -
============================================ ======= ======================= ======================
Cash and cash equivalents at the beginning
of the year 10 146,677 194,153
============================================ ======= ======================= ======================
The notes below form part of these Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 April 2020
1. GENERAL INFORMATION
Polar Capital Technology Trust plc is a public limited company
registered in England and Wales whose shares are traded on the
London Stock Exchange.
The principal activity of the Company is that of an investment
trust company within the meaning of Section 1158/1159 of the
Corporation Tax Act 2010 and its investment approach is detailed in
the Strategic Report.
The Financial Statements have been prepared in accordance with
International Financial Reporting Standards (IFRS), which comprise
standards and interpretations approved by the International
Accounting Standards Board (IASB) and International Accounting
Standards Committee (IASC), as adopted by the European Union and
with those parts of the Companies Act 2006 applicable to companies
reporting under IFRS and IFRIC guidance.
The Company's presentational currency is Pounds Sterling. All
figures are rounded to the nearest thousand pounds (GBP'000) except
as otherwise stated.
2. ACCOUNTING POLICIES
The principal accounting policies, which have been applied
consistently for all years presented are set out below:
(A) BASIS OF PREPARATION
The Financial Statements have been prepared on a going concern
basis under the historical cost convention, as modified by the
inclusion of investments and derivative financial instruments at
fair value through profit or loss.
Where presentational guidance set out in the Statement of
Recommended Practice (SORP) for investment trusts issued by the
Association of Investment Companies (AIC) in October 2019 is
consistent with the requirements of IFRS, the Directors have sought
to prepare the Financial Statements on a basis compliant with the
recommendations of the SORP.
Following the guidance of the revised SORP, issued in October
2019, the presentation of gains and losses arising from disposals
of investments and gains and losses on revaluation of investments
have now been combined, as shown in note 13 to the Financial
Statements in the Annual Report, with no impact to the net asset
value or profit/(loss) reported for both the current or prior year.
No other accounting policies or disclosures have changed as a
result of the revised SORP.
The financial position of the Company as at 30 April 2020 is
shown in the balance sheet above. As at 30 April 2020 the Company's
total assets exceeded its total liabilities by a multiple of over
22. The assets of the Company consist mainly of securities that are
held in accordance with the Company's Investment Policy, as set out
above and these securities are readily realisable. The Company has
two, two-year fixed rate term loans with ING Bank N.V both of which
fall due for repayment on 2 October 2020. The Directors have
considered a detailed assessment of the Company's ability to meet
its liabilities as they fall due. The assessment took account of
the Company's current financial position, its cash flows and its
liquidity position. In addition to the assessment the Company
carried out stress testing, including for the impact of COVID-19,
which used a variety of falling parameters to demonstrate the
effects in the Company's share price and net asset value. In light
of the results of these tests, the Company's cash balances, and the
liquidity position, the Directors consider that the Company has
adequate financial resources to enable it to continue in
operational existence. Further, based on the
Company's performance and the views collated from Shareholders,
the Board are in agreement that the continuation vote does not
impact the Company's ability to prepare the Financial Statements on
a going concern basis. Accordingly, the Directors believe that it
is appropriate to continue to adopt the going concern basis in
preparing the Company's Financial Statements.
(B) PRESENTATION OF STATEMENT OF COMPREHENSIVE INCOME
In order to reflect better the activities of an investment trust
company and in accordance with the guidance set out by the AIC,
supplementary information which analyses the Statement of
Comprehensive Income between items of a revenue and capital nature
has been presented alongside the Statement of Comprehensive Income.
The results presented in the revenue return column is the measure
the Directors believe appropriate in assessing the Company's
compliance with certain requirements set out in section 1158 of the
Corporation Taxes Act 2010.
(C) INCOME
Dividends receivable from equity shares are taken to the revenue
return column of the Statement of Comprehensive Income on an
ex-dividend basis.
Special dividends are recognised on an ex-dividend basis and may
be considered to be either revenue or capital items.
The facts and circumstances are considered on a case by case
basis before a conclusion on appropriate allocation is reached.
Where the Company has received dividends in the form of
additional shares rather than in cash, the amount of the cash
dividend foregone is recognised in the revenue return column of the
Statement of Comprehensive Income. Any excess in value of shares
received over the amount of the cash dividend foregone is
recognised in the capital return column of the Statement of
Comprehensive Income.
Unfranked income includes the taxes deducted at source.
Bank interest, money market fund interest and other income
receivable are accounted for on an accruals basis and is recognised
in the period in which it was earned.
Interest outstanding at the year end is calculated on a time
apportioned basis using the market rates of interest.
(D) EXPENSES AND FINANCE COSTS
All expenses, including finance costs, are accounted for on an
accruals basis.
All indirect expenses have been presented as revenue items per
the non-allocation method except as follows:
-- any performance fees payable are allocated wholly to capital,
reflecting the fact that, although they are calculated on a total
return basis, they are expected to be attributable largely, if not
wholly, to capital performance.
-- transaction costs incurred on the acquisition or disposal of
investments are expensed either as part of the unrealised gain/loss
on investments (for acquisition costs) or as a deduction from the
proceeds of sale (for disposal costs).
Finance costs are calculated using the effective interest rate
method and are accounted for on an accruals basis.
(E) TAXATION
The tax expense represents the sum of the overseas withholding
tax deducted from investment income, tax currently payable and
deferred tax.
The tax currently payable is based on the taxable profit for the
year. Taxable profit differs from net profit as reported in the
Statement of Comprehensive Income because it excludes items of
income or expense that are taxable or deductible in other years and
it further excludes items that are never taxable or deductible. The
Company's liability for current tax is calculated using tax rates
that have been enacted or substantively enacted at the balance
sheet date.
In line with the recommendations of the SORP, the allocation
method used to calculate tax relief on expenses presented against
capital returns in the supplementary information in the Statement
of Comprehensive Income is the 'marginal basis'. Under this basis,
if taxable income is capable of being offset entirely by expenses
presented in the revenue return column of the Statement of
Comprehensive Income, then no tax relief is transferred to the
capital return column.
Deferred tax is the tax expected to be payable or recoverable on
temporary differences between the carrying amounts of assets and
liabilities in the Financial Statements and the corresponding tax
bases used in the computation of taxable profit, and is accounted
for using the balance sheet liability method. Deferred tax
liabilities are recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which
deductible temporary differences can be utilised.
Investment trusts which have approval as such under section 1158
of the Corporation Tax Act 2010 are not liable for taxation on
capital gains.
The carrying amount of deferred tax assets is reviewed at each
balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow
all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to
apply in the period when the liability is settled, or the asset is
realised based on tax rates that have been enacted or substantively
enacted at the balance sheet date.
Deferred tax is charged or credited in the Statement of
Comprehensive Income, except when it relates to items charged or
credited directly to equity, in which case the deferred tax is also
dealt with in equity.
(F) INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT OR LOSS
When a purchase or sale is made under contract, the terms of
which require delivery within the timeframe of the relevant market,
the investments concerned are recognised or derecognised on the
trade date and are initially measured at fair value.
On initial recognition the Company has designated all of its
investments as held at fair value through profit or loss as defined
by IFRS.
All investments are measured at subsequent reporting dates at
fair value, which is either the bid price or the last traded price,
depending on the convention of the exchange on which the investment
is quoted. Investments in unit trusts or OEICs are valued at the
closing price, the bid price or the single price as appropriate, as
released by the relevant investment manager.
Fair values for unquoted investments, or for investments for
which there is only an inactive market, are established by using
various valuation techniques. These may include recent arms length
market transactions, the current fair value of another instrument
that is substantially the same, discounted cash flow analysis and
option pricing models. Where there is a valuation technique
commonly used by market participants to price the instrument and
that technique has been demonstrated to provide reliable estimates
of prices obtained in actual market transactions, that technique is
utilised. Where no reliable fair value can be estimated for such
instruments, they are carried at cost, subject to any provision for
impairment.
Changes in fair value of all investments held at fair value and
realised gains and losses on disposal are recognised in the capital
return column of the Statement of Comprehensive Income.
(G) RECEIVABLES
Receivables are initially recognised at fair value and
subsequently measured at amortised cost. Receivables do not carry
any interest and are short-term in nature and are accordingly
stated at their nominal value (amortised cost) as reduced by
appropriate allowances for estimated irrecoverable amounts.
(H) CASH AND CASH EQUIVALENTS
Cash comprises cash on hand and demand deposits. Cash
equivalents are short-term, maturity of three months or less,
highly liquid investments that are readily convertible to known
amounts of cash.
The Company's investment in BlackRock's Institutional Cash
Series plc - US Treasury Fund of GBP36,962,000 (2019: nil) is
managed as part of the Company's cash and cash equivalents as
defined under IAS 7.
In the Balance Sheet bank overdrafts are shown within current
liabilities.
(I) PAYABLES
Payables are initially recognised at fair value and subsequently
measured at amortised cost. Payables are not interest- bearing and
are stated at their nominal value (amortised cost).
(J) BANK LOANS
Interest bearing bank loans are initially recognised at cost,
being the proceeds received net of direct issue costs, and
subsequently at amortised cost. The amounts falling due for
repayment within one year are included under current liabilities in
the Balance Sheet.
(K) DERIVATIVE FINANCIAL INSTRUMENTS
The Company's activities expose it primarily to the financial
risks of changes in market prices, foreign currency exchange rates
and interest rates. Derivative transactions which the Company may
enter into comprise forward exchange contracts, the purpose of
which is to manage the currency risks arising from the Company's
investing activities, quoted options on shares held within the
portfolio, or on indices appropriate to sections of the portfolio,
the purpose of which is to provide additional capital return.
The use of financial derivatives is governed by the Company's
policies as approved by the Board, which has set written principles
for the use of financial derivatives.
A derivative instrument is considered to be used for hedging
purposes when it alters the market risk profile of an existing
underlying exposure of the Company. The use of financial
derivatives by the Company does not qualify for hedge accounting
under IFRS. As a result, changes in the fair value of derivative
instruments are recognised in the Statement of Comprehensive Income
as they arise. If capital in nature, associated change in value is
presented in the capital return column of the Statement of
Comprehensive Income.
(L) RATES OF EXCHANGE
Transactions in foreign currencies are translated into Sterling
at the rate of exchange ruling on the date of each transaction.
Monetary assets, monetary liabilities and equity investments in
foreign currencies at the balance sheet date are translated into
Sterling at the rates of exchange ruling on that date. Realised
profits or losses on exchange, together with differences arising on
the translation of foreign currency assets or liabilities, are
taken to the capital return column of the Statement of
Comprehensive Income.
Foreign exchange gains and losses arising on investments held at
fair value are included within changes in fair value.
(M) SHARE CAPITAL
Represents the nominal value of authorised and allocated,
called-up and fully paid shares issued.
(N) CAPITAL RESERVES
Capital reserves - gains/losses on disposal includes:
-- gains/losses on disposal of investments
-- exchange differences on currency balances and on settlement of loan balances
-- cost of own shares bought back
-- other capital charges and credits charged to this account in
accordance with the accounting policies above
Capital reserve - revaluation on investments held includes:
-- increases and decreases in the valuation of investments and loans held at the year end.
All of the above are accounted for in the Statement of
Comprehensive Income except the cost of own shares bought back or
issued which are accounted for in the Statement of Changes in
Equity.
(O) SHARE ISSUE COSTS
Costs incurred directly in relation to the issue of new shares
together with additional share listing costs have been deducted
from the share premium reserve
(P) SEGMENTAL REPORTING
Under IFRS 8, 'Operating Segments', operating segments are
considered to be the components of an entity about which separate
financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate
resources and in assessing performance. The chief operating
decision maker has been identified as the Manager (with oversight
from the Board).
The Board is of the opinion that the Company is engaged in a
single segment of business, namely by investing in a diversified
portfolio of technology companies from around the world in
accordance with the Company's Investment Objective, and
consequently no segmental analysis is provided.
In line with IFRS 8, additional disclosure by geographical
segment has been provided in note 26 to the Financial Statements
within the Annual Report.
Further analyses of expenses, investment gains or losses, profit
and other assets and liabilities by country have not been given as
either it is not possible to prepare such information in a
meaningful way or the results are not considered to be
significant.
(Q) KEY ESTIMATES AND ASSUMPTIONS
Estimates and assumptions used in preparing the financial
statements are reviewed on an ongoing basis and are based on
historical experience and various other factors that are believed
to be reasonable under the circumstances. The results of these
estimates and assumptions form the basis of making judgements about
carrying values of assets and liabilities that are not readily
apparent from other sources.
The majority of the Company's investments are in US Dollars, the
level of which varies from time to time. The Board considers the
functional currency to be Sterling. In arriving at this conclusion
the Board considered that Sterling is most relevant to the majority
of the Company's Shareholders and creditors and the currency in
which the majority of the Company's operating expenses are
paid.
The only estimates and assumptions that may cause material
adjustment to the carrying value of assets and liabilities relate
to the valuation of unquoted investments and investments for which
there is an inactive market. These are valued in accordance with
the techniques set out in note 2(f) above. At the year end, such
investments represent less than 0.01% of net assets and
consequently, the Board does not believe these to represent an area
of significant judgement or estimation.
(R) NEW AND REVISED ACCOUNTING STANDARDS
There were no new IFRSs or amendments to IFRSs applicable to the
current year which had any significant impact on the Company's
financial statements.
The following standards became effective on 1 January 2019 and
the adoption of the standards and interpretations have not had a
material impact on the financial statements of the Company.
IFRS 16 Leases
As the Company neither holds, trades or has any lease
obligations of any type, the provisions of this standard are not
expected to have a material impact on the financial statements.
IFRS 9 (Amended) Prepayment Features with Negative
Compensation
Negative compensation arises where the contractual terms permit
a borrower to prepay the instrument before its contractual
maturity, but the prepayment amount could be less than unpaid
amounts of principal and interest. The Company has no such terms in
any of its loan agreements in place and the amendment are not
expected to have any impact on the financial statements.
IFRIC 23 Uncertainty over Income Tax Treatments
The interpretation provides guidance on considering uncertain
tax treatments in relation to taxable profit or loss and does not
add any new disclosures. The Company complies with all relevant tax
laws where applicable and the provisions of this interpretation are
not expected to have a material impact on the financial
statements.
IAS 19 (amended) Employee Benefits
As the Company has no employees, the amendment to this standard
are not expected to have any impact on the financial
statements.
IAS 28 (amended) Investments in Associates and Joint
Ventures
As the Company has no investment in associates or joint
ventures, the amendment to this standard are not expected to have
any impact on the financial statements.
Annual Improvement Cycles 2015-2017 (Amendments)
This makes narrow-scope amendments to four IFRS Standards: IFRS
3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 Incomes
Taxes and IAS 23 Borrowing costs. These limited amendments are not
expected to have any impact on the financial statements.
At the date of authorisation of the Company's financial
statements, the following new IFRSs that potentially impact the
Company are in issue but are not yet effective and have not been
applied in the financial statements:
Effective for periods commencing on or after 1 January 2020:
IFRS 3 Business Combinations (amended)
The IASB has made narrow-scope amendments to improve the
definition of a business in order to help companies determine
whether an acquisition made is of a business or a group of assets.
These amendments are not expected to have any impact on the
financial statements.
IFRS 9, IAS 39 and IFRS 17: Interest Rate Benchmark Reform
(amended)
The IASB has issued amendments to IFRS 9, IAS 39 and IFRS 7 that
provide certain reliefs in connection with interest rate benchmark
reform. The reliefs relate to hedge accounting and have the effect
that IBOR reform should not generally cause hedge accounting to
terminate. These amendments are not expected to have any impact on
the financial statements.
IAS 1 and IAS 8 Definition of Material (amended)
The definition of material has been amended to state that
"information is material if omitting, misstating or obscuring it
could reasonably be expected to influence decisions that the
primary users of general purpose financial statements make on the
basis of those financial statements, which provide financial
information about a specific reporting entity." This new definition
is not expected to change how materiality judgements are currently
made by the Company nor have any impact to the material information
inclusive in the Annual Report.
References to the Conceptual Framework in IFRS Standards
(amended)
The Amendments to References to the Conceptual Framework in IFRS
Standards was issued to support transition to the revised
Conceptual Framework for companies that develop accounting policies
using the Conceptual Framework when no IFRS Standard applies to a
particular transaction. This amendment is not expected to have any
impact to the financial statements.
Effective for periods commencing on or after 1 January 2021:
IFRS 17 Insurance Contracts
The Directors expect that the adoption of the standards listed
above will have either no impact or that any impact will not be
material on the Financial Statements of the Company in future
periods.
3. INVESTMENT INCOME Y e ar e n
ded 30 A p Year ended
r il 2 0 20 30 April 2019
GBP '000 GBP'000
========================================= ============================ ==============================
R eve nue:
========================================= ============================ ==============================
F r a n k e d : Lis t ed inves tme n ts
========================================= ============================ ==============================
Di vidend income 21 76
========================================= ============================ ==============================
U n fr an k e d: Lis t ed inves tme n ts
========================================= ============================ ==============================
Di vidend income 15,740 11,889
========================================= ============================ ==============================
15,761 11,965
========================================= ============================ ==============================
All investment income is derived from listed investments.
4. OTHER OPERATING INCOME Y e ar e n
Y e ar e n ded
ded 30 A p 3 0 A p r il
r il 2 0 20 2 0 19
GBP '000 GBP '000
--------------------------- ---------------------------- -----------------------------
Bank interest 772 1,099
Money market fund interest 353 -
Other income - 6
=========================== ============================ =============================
1,125 1,105
=========================== ============================ =============================
5. GAINS ON INVESTMENTS HELD AT FAIR VALUE Y e ar e
Y e ar e n n ded
ded 30 A p 3 0 A p r
r il 2020 il 2019
GBP '000 GBP '000
=========================================== =========================== ==========
Net ga ins on dis pos al of inves tme n
ts at his tor ic cost 292,086 291,338
=========================================== =========================== ==========
T r a ns f er on dis pos al of inves tme
n ts (258,368) (197,726)
=========================================== =========================== ==========
G a i ns on disposal of investments based
on c a r r y ing v alue at prev ious b a
l ance she et date 33,718 93,612
=========================================== =========================== ==========
V a lua tion ga ins on inve s tmen ts held
du r ing the year 314,400 299,614
=========================================== =========================== ==========
348,118 393,226
=========================================== =========================== ==========
6. GAINS ON DERIVATIVES Y e ar e
Y e ar e n n ded
ded 30 A p 3 0 A p r
r il 2020 il 2019
GBP '000 GBP '000
=========================================== =========================== ================
G a i ns on dis pos al of de ri v a t ives
held 28,339 2,361
=========================================== =========================== ================
Loss es on rev alua tion of de ri v a t
ives held (15,125) (891)
=========================================== =========================== ================
13,214 1,470
=========================================== =========================== ================
The derivative financial instruments represent the call and put
options, which are used for the purpose of efficient portfolio
management. As at 30 April 2020, the Company held NASDAQ 100 Stock
Index put options and the market value of the open put option
position was GBP2,668,000 (30 April 2019: NASDAQ 100 Stock Index
put options with a market value of GBP150,000). As at 30 April
2020, the Company held Intel Corporation call options and the
market value of the open call option position was GBP723,000 (30
April 2019: No call option was held).
7. OTHER CURRENCY GAINS Y e ar e n Y e ar e
ded n ded
3 0 A p r 3 0 A p r
il 2020 il 2019
GBP '000 GBP '000
----------------------------------------------- ---------- ----------
E x change gains on cu rrency b a l anc
es 8,588 3,947
Exchange losses on settlement of loan balances - (5,850)
=============================================== ========== ==========
E x change (losses)/ga ins on t r ans l
a tion of lo an b a l anc es (3,337) 3,816
=============================================== ========== ==========
5,251 1,913
=============================================== ========== ==========
8. INVESTMENT MANAGEMENT AND PERFORMANCE FEE
Y e ar e
Y e ar e n n ded 30
ded 30 A p A p r il
r il 2020 2019
GBP '000 GBP '000
========================================== =========================== ===================
I n v est m e nt m a n a g e m e nt f ee
p a yable to Po l ar Ca pital ( ch arged
wh o l ly to
r e ven u e ) 18,273 15,341
========================================== =========================== ===================
Pe r f ormance f ee p ayable to Pol ar C
apital (cha rged wholly to c apital) 1,050 6,644
========================================== =========================== ===================
The new investment agreements which came into effect on 1 May
2019 includes a reduction in the base management fee above certain
sizes of net asset value and a reduced percentage of outperformance
payable to the Manager. In addition, the cap on any such
performance fee payable was also reduced. The basis for calculating
the investment management and performance fees are set out in the
Strategic Report above and details of all amounts payable to the
Manager are given in note 13 below.
The management fee and performance fee for year ended 30 April
2019 were calculated based on the fee basis prior to 1 May 2019,
the details of which is set out in the Annual Report for the year
ended 30 April 2019.
The quarterly investment management fee is calculated on the net
asset value on the last day of the prior quarter. The increase in
the management fee for the year ended 30 April 2020 is mainly due
to the 19% increase in net asset value which took place over the
year to 30 April 2020.
9. OTHER ADMINISTRATIVE EXPENSES
Y e ar e Y e ar e
n ded n ded 30
3 0 A p A p r il
r il 2020 2019
GBP '000 GBP '000
============================================== ========== ==============
Dire c tor s' f e es 1 196 190
============================================== ========== ==============
National Insu r ance Con t r ibutions 16 14
============================================== ========== ==============
D e p osita ry f ee 2 160 137
============================================== ========== ==============
R e g is t r ar f ee 46 47
============================================== ========== ==============
Cus t o dy a nd o ther b a nk charges 3 219 159
============================================== ========== ==============
U K L A and LSE lis ting f e es 96 83
============================================== ========== ==============
Le gal & pro f es s ional f e es and other
financial services 4 12 35
============================================== ========== ==============
A IC fees 21 21
============================================== ========== ==============
A uditor s' re mune r a tion -
for audit of the financial statements 35 25
============================================== ========== ==============
Dire c tor s' and o ffi ce r s' li ability
insu r ance 9 9
============================================== ========== ==============
A GM expens es 10 10
============================================== ========== ==============
C or por ate brok e r s' f ee 5 37 56
============================================== ========== ==============
PR , website and ma r k e ting e xp ens es(6) - 43
============================================== ========== ==============
Shareholder communi c a tions 44 49
============================================== ========== ==============
R e s earch cos ts 6 - 238
============================================== ========== ==============
Ot her e x p e nses 50 24
============================================== ========== ==============
951 1,140
============================================== ========== ==============
1. Full disclosure is given in the Directors' Remuneration
Report contained within the Company's 2020 Annual Report.
2. Depositary fee is based on the value of the net assets. The
net assets increased by 19% during the year under review.
3. Fee determined on the pre-approved rate card with HSBC and
the additional custody charge relates to the Money Market Fund
which came into effect 1 October 2019.
4. Prior year includes costs relating to the new fee
arrangements and the arrangement of the new loan facilities.
5. Prior year includes costs relating to the review of the new fee arrangements.
6. The new investment management agreement which came into
effect from 1 May 2019, included removal of any contribution by the
Company to research costs and reduction in marketing spend by the
Company. Details of the investment management agreement are
disclosed in the Strategic Report above.
10. CASH AND CASH EQUIVALENTS 3 0 A p 3 0 A p r
r il 2020 il 2019
GBP '000 GBP '000
============================== ============= ===========
C ash at b ank 109,715 194,544
Money market funds 36,962 -
============================== ============= ===========
Cash and cash equivalents 146,677 194,544
============================== ============= ===========
Bank overdraft - (391)
============================== ============= ===========
146,677 194,153
============================== ============= ===========
As at 30 April 2020, the Company held BlackRock's Institutional
Cash Series plc - US Treasury Fund with a market value of
GBP36,962,000 (30 April 2019: nil), which is managed as part of the
Company's cash and cash equivalents as defined under IAS 7.
11. (LOSSES)/EARNINGS PER ORDINARY SHARE
Y e a r e n ded 30 A Y e a r e n ded 30 A
p r il 2 020 p r il 2 0 19
---------------------------------------- ----------------------------------------
C ap T o t T o t
R evenue ital retu al retu R evenue C ap ital al
retu rn rn rn retu rn retu rn retu rn
----------------------- ------------ ------------ ------------ ------------ ------------ ------------
T he c a lcu l a tion
of bas ic ea r nings
p er share is based
on the follo w ing
data:
------------ ------------ ------------ ------------ ------------ ------------
N et ( l o s s ) /
prof it for the ye
a r (GBP'00 0) (5,431) 365,533 360,102 (6,328) 389,965 383,637
------------ ------------ ------------ ------------ ------------ ------------
W e ig ht ed ave rage
or dina ry shares
in issue d u r ing
the year 133,837,576 133,837,576 133,837,576 133,821,384 133,821,384 133,821,384
------------ ------------ ------------ ------------ ------------ ------------
F rom con tinuing
op e r a tions
------------ ------------ ------------ ------------ ------------ ------------
B asic and diluted
- ordinary shar es
( penc e) (4.06) 273.12 269.06 (4.73) 291.41 286.68
----------------------- ------------ ------------ ------------ ------------ ------------ ------------
As at 30 April 2020, there are no potentially dilutive shares in
issue and the earnings per share therefore equate to those shown
above (2019: there was no dilution).
12. SHARE CAPITAL
3 0 A p 3 0 A p r
r il il
2020 2019
GBP '000 GBP '000
================================================== ============ ============
A llo t t ed, C alled up and F ully p aid:
================================================== ============ ============
Ordinary shares of 25p each
================================================== ============ ============
Opening balance of 133,825,000 (30 April 2019:
133,795,000) 33,456 33,449
================================================== ============ ============
Issue of 741,000 (30 April 2019: 30,000) ordinary
shares 185 7
================================================== ============ ============
Allotted, called up and fully paid: 134,566,000
(30 April 2019: 133,825,000) ordinary shares
of 25p 33,641 33,456
================================================== ============ ============
A t 30 April 2 0 20 33,641 33,456
================================================== ============ ============
During the year a total of 741,000 ordinary shares (30 April
2019: 30,000 ordinary shares), nominal value GBP185,000 (30 April
2019: nominal value GBP7,000) were issued to the market to satisfy
demand, at an average price of 1,734.01p per share, for a total net
consideration received of GBP12,849,000 (30 April 2019:
GBP398,000).
Subsequent to the year end, and to 10 July 2020 (latest
practicable date), 2,699,000 ordinary shares were issued at an
average price of 1,941.48p per share.
This reserve is not distributable.
13. TRANSACTIONS WITH THE MANAGER AND RELATED PARTY
TRANSACTIONS
(A) TRANSACTIONS WITH THE MANAGER
Under the terms of an agreement dated 9 February 2001 the
Company has appointed Polar Capital LLP ("Polar Capital") to
provide investment management, accounting, secretarial and
administrative services. Details of the fee arrangement for these
services are given in the Strategic Report. The total management
fees, paid under this agreement to Polar Capital in respect of the
year ended 30 April 2020 were GBP18,273,000 (2019: GBP15,341,000)
of which GBPnil (2019: GBP3,876,000) was outstanding at the
yearend.
A performance fee amounting to GBP1,050,000 (2019: GBP6,644,000)
is payable in respect of the year, and the whole of this amount
(2019: same) was outstanding at the year end.
In addition, the total research costs in respect of the year
ended 30 April 2020 were GBPnil (2019: GBP238,000) of which GBPnil
(2019: GBPnil) was outstanding at the year end.
The new investment management agreement which came into effect
from 1 May 2019 agreed the removal of any contribution by the
Company to research costs; a reduction in the marketing costs
payable by the Company with the Manager contributing the first
GBP100,000 per annum to such; a reduction in the base management
fee above certain sizes of net asset value; a reduced percentage of
outperformance payable to the Manager; a reduction in the cap on
any such performance fee payable. Details of the revised terms of
the investment management agreement are provided in the Strategic
Report on above.
(B) RELATED PARTY TRANSACTIONS
The compensation payable to key management personnel in respect
of short term employee benefits is GBP196,000 (2019: GBP190,000)
which comprises GBP196,000 ((2019: GBP190,000) paid by the Company
to the Directors.
Refer to Company's 2020 Annual Report for the Directors'
Remuneration Report including Directors' shareholdings and
movements within the year.
14. NET ASSET VALUE PER ORDINARY SHARE
N e t a s set value
per share
=========================================== ---------------------------------
3 0 A p 3 0 A p r
r il il
2020 2019
=========================================== ================ ===============
U nd ilut e d:
=========================================== ================ ===============
Net as s e ts a t t r ibutable to or d ina
ry Shareholders ( GBP ' 00 0) 2,308,597 1,935,646
=========================================== ================ ===============
Or dina ry shares in issue at end of year 134,566,000 133,825,000
=========================================== ================ ===============
Net as s et v alue p er or d ina ry share
( p enc e) 1715.59 1446.40
=========================================== ================ ===============
As at 30 April 2020, there were no potentially dilutive shares
in issue (2019: there was no dilution).
15. POST BALANCE SHEET EVENT
The outbreak of the Novel Coronavirus (COVID-19), declared by
the World Health Organisation as a global health emergency on the
30 January 2020, which has caused disruption to economic activity
and brought increased market volatility across many of the global
stock markets. Subsequent to the year end, the global stock markets
continue experience substantial fluctuations associated with
uncertainties linked to the COVID-19 pandemic. The Board and
Investment Manager continue to monitor developments relating to
COVID-19 and the impact on investment performance in line with the
investment objectives. As at 10 July 2020 (the latest practicable
date), the Company's unaudited net asset value as at the close of
business has risen by 21.3%.
Polar Capital, the appointed Investment Manager, is coordinating
its operational response based on existing business continuity
plans and on guidance from global health organisations, UK
government and general pandemic response best practice.
Subsequent to the year end, and to 10 July 2020 (latest
practicable date), 2,699,000 ordinary shares were issued at an
average price of 1,941.48p per share.
There are no other significant events that have occurred after
the end of the reporting period to the date of this report which
require disclosure.
ALTERNATIVE PERFORMANCE MEASURES (APMS)
In assessing the performance of the Company the Investment
Manager and the Directors use the following APMs which are
considered to be known industry metrics:
Net Asset Value (NAV)
The NAV is the value attributed to the underlying assets of the
Company less the liabilities, presented either on a per share or
total basis.
The value of the Company's assets, principally investments made
in other companies and cash being held, minus any liabilities. The
NAV is also described as 'Shareholders' funds' per share. The NAV
is often expressed in pence per share after being divided by the
number of shares which have been issued. The NAV per share is
unlikely to be the same as the share price which is the price at
which the Company's shares can be bought or sold by an
investor.
As at 30 April 2020, the Company's total equity was
GBP2,308,597,000 and there were 134,566,000 ordinary shares in
issue. The Company's NAV per share was therefore 1715.59p
(GBP2,308,597,000/134,566,000).
NAV Total Return
The NAV total return shows how the net asset value per share has
performed over a period of time taking into account both capital
returns and dividends paid to Shareholders.
NAV total return reflects the change in value of NAV plus the
dividend paid to the Shareholder. Since the Company has not paid a
dividend the NAV total return is the same as the NAV per share
return as at the year ended 30 April 2020.
Share Price Total Return
Share price total return shows how the share price has performed
over a period of time. It assumes that dividends paid to
Shareholders are reinvested in the shares at the time the shares
are quoted ex dividend.
Share price total return reflects the change in share price
value plus the dividend paid to the Shareholder. Since the Company
has not paid dividends the share price total return is the same as
the price per ordinary share return as at year end 30 April
2020.
Discount/Premium
A description of the difference between the share price and the
net asset value per share usually expressed as a percentage (%) of
the net asset value per share. If the share price is higher than
the NAV per share the result is a premium. If the share price is
lower than the NAV per share, the shares are trading at a
discount.
The share price at 30 April 2020 was 1774.00p and the NAV was
1715.59p, the premium was therefore 3.4%, ((1774.00p
-1715.59p)/1715.59p).
Total Expenses
Comprising all the operating expenses, which includes research
costs, of the Company plus those expenses which are excluded from
the ongoing charges calculation, including transaction costs,
finance costs, tax and non-recurring expenses. Costs in relation to
share issues and share buybacks are excluded from the
calculation.
At 30 April 2020, the total operating expenses including
management and performance fees were GBP20,274,000, finance costs
were GBP1,260,000 and taxes were GBP1,833,000, the total expenses
therefore were GBP23,367,000 (GBP20,274,000 + GBP1,260,000 +
GBP1,833,000 = GBP23,367,000).
Ongoing Charges
Ongoing charges are calculated in accordance with AIC guidance
by taking the total expenses of the Company, excluding performance
fees and exceptional items, if any, and expressing them as a
percentage of the average daily net asset value of the Company over
the year.
Ongoing charges include all regular operating expenses of the
Company. Transaction costs, interest payments,
tax and non-recurring expenses are excluded from the calculation
as are the costs incurred in relation to share
issues and share buybacks.
Where a performance fee is paid or is payable, a second ongoing
charge is provided, calculated on the same basis as the above but
incorporating the amount of performance fee due or paid.
Ongoing charges for the year equal the management fee of
GBP18,273,000 plus other operating expenses of GBP951,000 divided
by the Company's average daily NAV in the period.
(GBP19,224,000/GBP2,057,773,000 = 0.93%)
Ongoing charges including performance fee based on the above
plus the performance fee of GBP1,050,000
(GBP20,274,000/GBP2,057,773,000 = 0.99%).
GLOSSARY OF TERMS
AAII Bear
American Association of Individual Investors sentiment survey
showing the mood of individual investors -
Bullish/Neutral/Bearish
AAF Report
A report prepared in accordance with Audit and Assurance Faculty
guidance issued by the Institute of Chartered Accountants in
England and Wales. Utilised within the review of internal
controls.
AGM
The Annual General Meeting will be held on Wednesday, 2
September 2020. Details of the arrangements will be provided in the
separate Notice of AGM and on the Company's website.
AIC
Association of Investment Companies, the industry body for
closed ended investment companies.
AIFM
Alternative Investment Fund Manager - Polar Capital LLP.
AIFMD
Alternative Investment Fund Managers Directive. Issued by the
European Parliament in 2012 and 2013, the Directive requires that,
while the Board of Directors of an Investment Trust remains fully
responsible for all aspects of the Company's strategy, operations
and compliance with regulations, all alternative investment
vehicles ('AIFs') in the European Union, must appoint a Depositary
and an Alternative Investment Fund Manager ('AIFM'). The Company's
AIFM is Polar Capital LLP.
Benchmark
The Dow Jones World Technology Index (total return, Sterling
adjusted, with the removal of relevant withholding taxes).
BREXIT
The advisory public referendum which was held on 23 June 2016 in
the United Kingdom to indicate whether voters wanted to remain or
withdraw from membership of the European Union (EU). The referendum
vote was cast in favour to leave the EU. The process of actually
leaving is termed BREXIT.
Closed-ended Investment Company
An Investment Company with a fixed issued ordinary share
capital, the shares of which are traded on an exchange at a price
not necessarily related to the net asset value of the company and
which can only be issued or bought back by the company in certain
circumstances.
Custodian
The Custodian is HSBC Bank plc, a financial institution
responsible for safeguarding, worldwide, the listed securities and
certain cash assets of the Company, as well as the income arising
therefrom, through provision of custodial, settlement and
associated services.
Depositary
The Depositary is also HSBC Bank plc. Under AIFMD rules the
Company must appoint a Depositary whose duties in respect of
investments, cash and similar assets include: safekeeping;
verification of ownership and valuation; and cash monitoring. Under
the AIFMD rules, the Depositary has strict liability for the loss
of the Company's financial assets in respect of which it has
safe-keeping duties. The Depositary's oversight duties will include
but are not limited to share buybacks, dividend payments and
adherence to investment limits.
Derivative
A contract between two or more parties, the value of which
fluctuates in accordance with the value of an underlying security.
Examples of derivatives are Put and Call Options, Swap contracts,
Futures and Contracts for Difference. A derivative can be an asset
or a liability and is a form of gearing because it can increase the
economic exposure to Shareholders.
Discount / Premium
The Company's share price is determined by market demand for the
Company's shares. If the share price is lower than the NAV per
share, the shares are said to trade at a discount. If the share
price is higher than the NAV, this is described as trading at a
premium. Trading at a discount might indicate a higher level of
sellers in the market while trading at a premium might indicate
higher buying demand.
Fund/Portfolio Manager
Ben Rogoff of Polar Capital LLP has been delegated
responsibility for the creation of the portfolio of investments
subject to the investment policy and various parameters set by the
Board of Directors.
GAAP
The Generally Accepted Accounting Practice. This includes UK
Financial Reporting Standards ('FRS') and International GAAP (IFRS
or International Financial Reporting Standards applicable in the
European Union).
Gearing
Calculated using the Association of Investment Companies
definition. Total assets, less current liabilities (before
deducting any prior charges (such as borrowings)) minus cash/cash
equivalents divided by Shareholders' funds, expressed as a
percentage.
Investment Company
Section 833 of the Companies Act 2006. An Investment Company is
defined as a company which invests its funds in shares, land or
other assets with the aim of spreading investment risk.
Investment Trust taxation status
Section 1158 of the Corporation Tax Act 2010. UK Corporation Tax
law allows an Investment Company (referred to in Tax law as an
Investment Trust) to be exempted from tax on its profits realised
on investment transactions, provided it complies with certain
rules. These are similar to Section 833 above but further require
that the Company must be listed on a regulated stock exchange and
that it cannot retain more than 15% of income received. The
Directors' Report contains confirmation of the Company's compliance
with this law and its consequent exemption from taxation on capital
gains.
KPMG
The Company's auditor is KPMG LLP, represented by John Waterson,
Partner.
Leverage
As defined under AIFMD rules, leverage is any method by which
the exposure of an AIF is increased through borrowing of cash or
securities or leverage embedded in derivative positions. Leverage
is broadly equivalent to gearing but is expressed as a ratio
between the assets (excluding borrowings) and the net assets (after
taking account of borrowings).
Manager/Investment Manager
Polar Capital LLP (Polar Capital), also appointed as AIFM. The
responsibilities and fees payable to Polar Capital are set out in
the Directors' Report.
MiFID II
Markets in Financial Instruments Directive, applicable from 3
January 2018.
Non-executive Director
The Company is managed by a Board of Directors who are appointed
by letter rather than a contract of employment, with the Company.
The Company does not have any executive Directors. Remuneration of
the Non-executive Director is set out in the Directors'
Remuneration Report while the duties of the Board and the various
Committees is set out in the Report on Corporate Governance.
PRIIPS
The Packaged Retail and Insurance-based Investment Products
regulations which came into force on 1 January 2018 in the UK and
EU. The regulations require generic pre-sale disclosure of
investment 'product' costs, risks and certain other matters.
SORP
The Statement of Recommended Practice. The financial statements
of the Company are prepared in accordance with the Investment Trust
SORP issued by the AIC.
FORWARD LOOKING STATEMENTS
Certain statements included in this Annual Report and Financial
Statements contain forward-looking information concerning the
Company's strategy, operations, financial performance or condition,
outlook, growth opportunities or circumstances in the countries,
sectors or markets in which the Company operates. By their nature,
forward looking statements involve uncertainty because they depend
on future circumstances, and relate to events, not all of which are
within the Company's control or can be predicted by the Company.
Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, no assurance can be
given that such expectations will prove to have been correct.
Actual results could differ materially from those set out in the
forward-looking statements. For a detailed analysis of the factors
that may affect our business, financial performance or results of
operations, we urge you to look at the principal risks and
uncertainties included in the Strategic Report within the Annual
Report. No part of these results constitutes, or shall be taken to
constitute, an invitation or inducement to invest in Polar Capital
Technology Trust plc or any other entity and must not be relied
upon in any way in connection with any investment decision. The
Company undertakes no obligation to update any forward-looking
statements.
Annual Report and Notice of AGM
The Annual Report and Financial Statements for the year ended 30
April 2020 will shortly be available on the Company's website
www.polarcapitaltechnologytrust.co.uk and will be posted to
Shareholders in late July.
The Annual General Meeting will be held on 2 September 2020,
full details of the arrangements will be provided in the Notice of
AGM and on the Company's website in due course.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR UORKRRRUBAAR
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